It hasn't even been on the public markets for three months yet, but Qudian (NYSE:QD) already looks like a dead stock walking. Essentially the Chinese equivalent of an online payday lender, Qudian, much like its U.S. counterparts, faces a tough new regulatory environment that may spell its doom.

The need to spend

Qudian seemed like it had promise when it went public in October. China's growing economy has created an expanding number of rising-income workers who are adopting a more consumerist mindset. The country's private consumption rate had grown at a compounded 9.5% annual rate between 2010 and 2015, with the potential to grow at a still-robust rate of 6.8% through 2021.

Man looking at declining share price chart on tablet and pounding fist on table

Image source: Getty Images.

The rise of consumerism has been accompanied by growing demand for credit. While the People's Bank of China traditionally serves consumers, it usually lends money only to those with substantial credit histories. However, the rise of China's youth as a force for consumerism has resulted in a large class of individuals who lack a credit history yet still desire loans. They have sufficient incomes to service debt, but they haven't established themselves enough to earn it.

That's where Qudian saw an opportunity. Online consumer loans were predicted to grow at a phenomenal 54% annual rate between 2016 and 2021, according to Qudian's SEC Form F-1, and the market has hundreds of millions of potential customers.

Buying on credit

Qudian says that based on the number of active borrowers and transactions processed, it is the largest online provider of small-cash credit products in China. When it went public, it had facilitated about $5.6 billion worth of transactions for 7 million borrowers while maintaining an exceptionally low delinquency rate.

Backed by Chinese e-commerce giant Alibaba's (NYSE:BABA) Ant Financial consumer credit business, it is a pure, online-only lender whose cash loans average $136 and are typically repaid within two months, while its merchandise credit loans average $184 and are usually repaid within eight months.

With those kinds of numbers, it's no surprise there was high demand for its public offering. Qudian priced 37.5 million shares at $24 a stub for a total offering size of about $900 million, making it one of the biggest IPOs of 2017. In fact, only Snap ($3.4 billion), Altice USA ($1.9 billion), and Invitation Homes ($1.5 billion) were bigger. It was also the biggest IPO ever for a Chinese financial technology company.

On its first day of trading, shares opened more than 43% higher in the first few minutes, and they closed the session some 30% above the offering price. But it wasn't long before the wheels came off.

Tightening the financial noose

In November, China announced its intention to crack down on micro lenders and asked provincial governments to stop granting regulatory approval for new companies. It worries that people will "blindly borrow" money without sufficient means to repay it. In response, Alibaba's Alipay platform said it would impose a 24% annual percentage rate cap, inclusive of all interest, fees, and charges on loans made through the channel. The majority of Qudian's customers are engaged through the Alipay interface.

The effect of the new regulatory environment was immediate: Qudian lost nearly half its value in a matter of days. Today its shares trade more than 60% below the highs it hit after its IPO.

While Wall Street analysts were initially enthusiastic about Qudian's potential, there's no longer reason to hold out such hope. The U.S. payday lending industry was crushed when the government went after the lenders, and the hits have kept on coming. Last October the Consumer Financial Protection Bureau proposed regulations that would require lenders to determine whether borrowers can repay their debts while also capping the number of loans a lender can make to a single borrower (though the CFPB is now considering repealing those rules under the leadership of Trump appointee Mick Mulvaney).

It looks like China is putting its micro-loan industry under the microscope, so there seems little reason to think Qudian has anywhere to go but down from here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.