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(Yicai Global) Oct. 24 -- This year has seen the first few Chinese fintech companies seeking an initial public offering (IPO) overseas, with some listing in the US and Hong Kong.

Thus far, Yirendai Ltd. [NYSE:YRD], China Rapid Finance Ltd. [NYSE:XRF] and Qudian Inc. [NYSE:QD] have successfully applied for listings on the New York Stock Exchange. Zhongan Online P & C Insurance Co. [HKG:6060] kicked off an IPO in Hong Kong late last month. More recently, Financial product search platform Jiapu Technology Inc. filed its IPO prospectus with the US Securities and Exchange Commission (SEC), proposing to raise up to USD200 million through a share offering. Also, Internet Financial Management Platform and Credit Co. and Shanghai PPDAI Financial Information Service Co. are expected to float on the American stock market as early as November, with many more China-based internet finance firms still preparing or applying for a US IPO.

This phenomenon attests to China's rise in the global fintech market, and to the rapid development and great potential of the Chinese internet finance industry. 

Financial technology is developing at an amazing speed in China, driven by dramatic advances in new technologies such as cloud computing, Big Data, blockchain, mobile internet and artificial intelligence (AI). These new technologies have made a big difference in people's everyday lives. Four of the five largest fintech companies in the world by capitalization are based in China. Ant Financial Services Group, the financial arm of Alibaba Group Holding Ltd. [NYSE:BABA] took top spot with a market cap of about USD60 billion, outranking US' Paypal Holdings Inc. [NASDAQ:PYPL] at second place by roughly USD13 billion. The total volume of third-party payment transactions processed by Ant Financial soared by 74 times from CNY1 trillion in 2010 to CNY79 trillion last year. The total value of mobile payments in China was 70 times higher than in the US, and the gap between the two countries in consumer related mobile payments is as high as 800 percent.

The recent wave of Chinese fintech companies going public in overseas stock markets was triggered, among others, by a remarkable growth in consumer finance -- mostly cash loans. The total value of these in the country is estimated to be between CNY600 billion and CNY1 trillion. From January through July, short-term consumer loans grew by CNY1.06 trillion, up 300 percent compared with the same period last year. The figure also exceeded the full-year increase last year. A considerable proportion of the loans are cash loans. The value of outstanding online peer-to-peer (P2P) loans rose by 36-fold between 2013 and 2016, implying an annual compound growth rate of 230 percent.

However, P2P lending only makes up 0.79 percent of China's total social financing. Most of the country's 360 million rural population, 170 million migrant workers, 37 million university students and some 70 million blue-collar workers lack direct access to financial services. An enormous unfulfilled demand and growing consumer spending resulting from the economic transition will fuel continuous expansion of the P2P lending market.

Venture capital has also been a significant factor behind the overseas IPO boom. Many Chinese fintech firms have received investments from VC funds. For example, the largest shareholder of Ppdai is Shen Nanpeng, a partner at Sequoia Capital, rather than its founder Zhang Jun -- Shen owns a 25.5 percent stake that eclipses Zhang's paltry 5.5 percent.

Some of the earliest investors in the fintech firms have benefitted from the IPO boom. Beijing Kunlun Tech Co. [SHE:300418] sold its shareholding in Qudian Inc. on the day of the latter's IPO, and bagged CNY345 million in profits from the deal -- a 1,300 percent return on investment, the company said.

Overseas IPO financing is a double-edged sword for such companies. An IPO can help them improve brand image and fund financing and re-financing operations to build momentum for future business growth. Their business models generally feature excess reliance on the consumer finance business and therefore cash loans. Cash loans can produce exorbitant profits over a short period, helping P2P lending platforms succeed in their overseas IPO applications, and even making them highly sought-after assets for foreign investors. Yet the sustainability of such business models is questionable, and a change in regulatory policies may expose these companies to risks.

So, what should the internet finance firms do to get access to the A-share market?

The first barrier is profitability and business sustainability requirements. Most of the firms were loss-making businesses a few years ago. Ppdai, for example, logged net losses of CNY72.14 million in 2015, but managed to deliver a net profit of CNY501.5 million the following year. Its earnings soared this year, and net profit topped CNY1 billion in the first half. Similarly, Qudian also reported a net profit of CNY973 million in the first half.

The Variable Interest Entity (VIE) structure poses the second obstacle. Many Chinese fintech firms are backed by dollar funds, so they must abandon the VIE model if they want to be listed on the A-share market. Shedding the VIE structures is a very complicated and time-consuming process.

Further, internet finance market regulation is subject to adjustment. As the market has developed, financial regulators have tightened their grip on P2P lending businesses. An increased incidence of internet finance-related frauds resulted in a crackdown on P2P platforms several years ago. Even today considerable controversy still swirls around the compliance of consumer and cash loans.

The author is a senior market analyst.