Yiren Digital left in the cold after parent freezes $4.4 billion in wealth products

The company’s shares fell nearly 25% over four days as investors worried about potential exposure to problems surrounding a major wealth management product issued by its parent

Key Takeaways:

• CreditEase has reportedly suspended principal and interest distributions on $4.4 billion of wealth management products issued by its Heritvest unit
• Yiren Digital swiftly issued a statement emphasizing its operational independence from CreditEase, which is its parent

By Warren Yang

For private financial companies in China, it’s painfully clear that any misstep can be costly as regulators closely watch their every move.

The latest casualty is CreditEase, an early online finance pioneer and parent of New York-listed Yiren Digital Ltd. (YRD.US). CreditEase has abruptly suspended both principal and interest distributions for 30 billion yuan ($4.4 billion) of fixed-income wealth management products issued by its Heritvest subsidiary, according to media reports last week.

Regulators appeared to act swiftly in the matter. People familiar with the situation told financial media Caixin that senior executives at CreditEase and Heritvest have been barred from leaving China and ordered to explain what’s going on to Beijing’s local financial regulators. The report didn’t state what exactly raised regulators’ concerns.

In China, wealth management products are a primary vehicle for allowing traditional banks and private firms to package high-yield, off-balance-sheet loans into fixed-income investments. This kind of murky practice is a key part of the Chinese version of “shadow banking,” and essentially allows companies to make risky products look safer. The products are popular among mom-and-pop investors seeking high returns.

But retail investors often perceive these instruments to be as safe as bank deposits and don’t fully understand their risks — until the high-risk underlying loans go sour. The result is that such products sometimes default, leaving thousands of people stranded without their promised returns and potentially forcing institutions that sold them into bankruptcy.

In an effort to defuse such risks, Chinese regulators have aggressively tightened oversight on the shadow banking sector by banning implicit guarantees and forcing platforms to unwind high-risk wealth management products. Yet the CreditEase episode has revived deep-seated anxieties around opaque risks still lingering within China’s vast shadow banking space.

Predictably, the shockwaves instantly crossed the ocean to New York, where Yiren Digital found itself caught in the line of fire. The two entities supposedly operate independently. But investors were quick to treat CreditEase’s problem as Yiren Digital’s, sending the latter’s share down by about 25% over four trading days.

Damage control

Last Tuesday, Yiren Digital rushed to issue a damage-control statement. The company tried to clear the air by saying that CreditEase’s trouble is entirely unrelated to its own day-to-day operations. The company went so far as to deny the authenticity of an open letter that was attributed to founder Tang Ning and circulated among panicking investors to announce the payment halt, according to the Caixin report.

So why did investors dump Yiren Digital shares despite the company’s attempt to distance itself from CreditEase? Because in the tightly knit world of private finance in China, operational independence is often an illusion. In fact, Caixin cited industry insiders and a former employee saying that Heritvest’s wealth management products were widely suspected of funding loans facilitated by Yiren Digital. Also, Yiren Digital acknowledged that CreditEase has begun winding down the affected products and has reported the move to financial watchdogs, according to the Caixin the report.

In its statement, Yiren Digital emphasized its operational independence by saying it makes transactions with its controlling shareholder and its affiliates “on an arm’s-length basis” and discloses them in filings.

Yer figuring out whether Yiren Digital has any wealth management product ties with CreditEase through its public disclosures is no easy feat. As part of a restructuring in 2019, Yiren took over online wealth management operations from CreditEast and its affiliates. But it’s not clear what, if any, wealth management products are handled by the business. In its annual reports, Yiren Digital discloses related party transactions with what appear to be wealth management units of CreditEase and Heritvest for customer acquisition and referral services.

Given this lack of clarity, it’s understandable why investors might take anything Yiren Digital says involving sensitive matters with a grain of salt.

Earlier crackdown

CreditEase’s latest run-in with authorities follows on the heels of a regulatory crackdown that hit Yiren Digital earlier this year when Beijing enforced a 24% ceiling for consumer loan interest rates. Previously, platforms like Yiren thrived in a highly lucrative operational gray zone, leveraging hidden processing and facilitation fees to push effective borrowing rates closer to 36%. The new enforcement regime permanently stripped away those extra charges, removing a big revenue generator for companies like Yiren Digital.

Yiren Digital isn’t the only private fintech finding life difficult these days. Just two weeks ago, the China Securities Regulatory Commission (CSRC) proposed big fines for online stock brokerages, Futu (FUTU.US) and UP Fintech (TIGR.US) for running unlicensed cross-border securities operations within China and ordered them to wind down their original Mainland business.

During the boom years of the mid-2010s, platforms like CreditEase were celebrated as vital financing agents. They specialized in lending to individual consumers and small businesses, filling credit voids left by conservative, state-owned banks that traditionally preferred lending to state-owned enterprises with collateral to offer in case of defaults.

But the group’s rapid growth resulted in a quick buildup of risks within China’s financial system, with the potential to send shockwaves through the economy. That led regulators to start coming down hard on them in the late 2010s, and the crackdown has pretty much continued steadily ever since.

The interest rate cap, coupled with a slowing economy in China, have already created a tough environment for Yiren Digital. Its revenue slipped last year, and it also booked massive provisions as credit risks rose. As a result, its net profit nearly evaporated for the year, plunging more than 96%. Its shares now trade at a miniscule price-to-sales (P/S) ratio of just 0.14, well below the 1 for New York-listed shares of rival Qfin (QFIN.US, 3660.HK), which isn’t particularly inspiring either. 

The unraveling of CreditEase’s wealth management product represents a final, painful reckoning for one of the few remaining survivors in China’s rapidly shriveling private loan sector. For investors, the takeaway is rather clear — buying shares in private Chinese fintech companies means fighting a powerful regulatory tide that shows no signs of easing. As long as regulators view private fintech firms as threats to financial stability, they will remain trapped in a hostile environment where mere survival is far from guaranteed.

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