China Called Finance Apps the Best Thing Since the Compass. No Longer.

When the coronavirus jammed up China’s economy last year, Rao Yong needed cash to tide over his online handicrafts business. But he dreaded the idea of spending long, dull hours at the bank.

The outbreak had snarled delivery services and made customers slow on their payments, so Mr. Rao, 33, used an app called Alipay to receive early payment on his invoices. Because his Alipay account was already tied to his digital storefront on Alibaba’s Taobao bazaar, getting the money was quick and painless.

Alipay had helped Mr. Rao a few years before as well, when his business was just starting to expand and he needed $50,000 to set up a supply chain.

“If I’d gone to a bank at that point, they would have ignored me,” he said.

China was a trailblazer in figuring out novel ways of getting money to underserved people like Mr. Rao. Tech companies like Alipay’s owner, an Alibaba spinoff called Ant Group, turned finance into a kind of digital plumbing: something embedded so thoroughly and invisibly in people’s lives that they barely thought about it. And they did so at colossal scale, turning tech giants into influential lenders and money managers in a country where smartphones became ubiquitous before credit cards.

Now the question is: What will regulation do to an industry that has thrived precisely because it offered services that China’s state-dominated banking system could not?

But the tech companies didn’t enter the finance business to make it easier to pay for coffee. They wanted to be where the real money was: extending credit and loans, managing investments, offering insurance. And with all their data on people’s spending, they believed they would be much better than old-fashioned financial institutions at handling the risks.

With the blessing of China’s leaders, finance arms began sprouting out of internet companies of all kinds, including the search engine Baidu, the retailer and the food-delivery giant Meituan. Between 2014 and 2019, consumer credit from online lenders nearly quadrupled each year on average, by one estimate. Nearly three-quarters of such platforms’ users were under the age of 35, according to iiMedia Research.

Last year, when Ant filed to go public, the company said more than $260 billion in credit was being extended to consumers on Alipay. That meant Ant alone was responsible for more than 12 percent of all short-term consumer lending in China, according to the research firm GaveKal Dragonomics.

Then in November, officials torpedoed Ant’s I.P.O. and got to work taking apart the plumbing that had connected Alipay with China’s banks.

They ordered Ant to make it less convenient for users to pay for purchases on credit — credit that was being largely funded by banks. They barred banks from offering deposits through online platforms and restricted how much banks could lend through them. At some banks, deposits offered through digital platforms accounted for 70 percent of their total deposits, a central bank official said in a speech.

In a news briefing last week, Fan Yifei, deputy governor at the central bank, said regulators would soon be applying the full Ant treatment to other platforms.

“On the one hand, the speed of development has been astonishing,” Mr. Fan said. “On the other hand, in the pursuit of growth, there have arisen monopolies, disorderly expansion of capital and other such behaviors.”

Ant declined to comment.

As Ant and Tencent scramble to meet regulators’ demands, they have pared credit services for some users.

Mr. Zhou, 21, makes about $600 a month at his desk job and wears his hair in a swooping, reddish-brown mullet. After he turned 18, Alipay and other apps began offering him thousands of dollars a month in credit. He took full advantage, traveling, buying gadgets and generally not thinking about how much he spent.

After Alipay slashed his credit limit in April, his first reaction was to call customer service in a panic. But he says he has since learned how to live within his means.

“For young people who really love spending to excess, this is a good thing,” Mr. Zhou said of the clampdown.

China’s brisk recent economic growth has most likely made officials more comfortable with reining in fintech, even at the expense of some innovation and consumer spending and borrowing.

“When you consider that household debt as share of household income is among the highest in the world right now” in China, “then more household debt is probably not a good idea,” said Michael Pettis, a finance professor at Peking University.

Qu Chaoqun, 52, was thrilled a few years ago to find he had access to $30,000 a month across several apps. But he wanted even more. He started buying lottery tickets.

Soon enough, Mr. Qu, a takeout-delivery driver in the megacity of Guangzhou, was borrowing on one app to pay his bills on another. He borrowed from friends and relatives to repay the apps, then borrowed again on the apps to repay his friends and relatives.

When his credit was cut by almost half in April, he fell into what he calls a “bottomless abyss” as he struggled to pay his outstanding debts.

“People inevitably have psychological fluctuations and impulses that can bring great harm and instability to themselves, to their families and even to society,” Mr. Qu said.

Albee Zhang contributed research.

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