Padded Pockets to the Rescue

Look to Consumer Finance Companies for Economic Hope

By staff reporter ZHU HONG

    THE China Banking Regulatory Commission (CBRC) broke new ground by approving the establishment of three consumer finance companies in January 2010. This is the debut for firms of this kind in China although they have existed for more than 400 years in Western countries.

New companies offer unsecured loans to individuals for the purchase of consumer durables.                                                  Illustration by Cnsphoto

Upside, Downside

    Consumer finance companies are distinguished by being able to offer unsecured loans to individuals for the purchase of consumer durables, without taking deposits from the public. Real estate and automobiles don’t fall into the consumer durable category, but home appliances, tuition for education, and expenses associated with travel and wedding ceremonies are covered by this line of credit. The spending limit may be capped at five times the borrower’s monthly income.

    The first batch of these companies will run on a trial basis in Beijing, Shanghai and Chengdu. The Bank of Beijing Consumer Finance Co., Ltd. announced its official establishment in March 2010 and has set up its first counter at Dazhong Electronics’ CCTV Tower outlet. How swiftly this new line of credit will be adopted by consumers still remains to be seen.

    Certain kinds of consumers see benefits. Xi Jingjing works in a PR firm in Beijing. Though blessed with healthy earnings, she invests so much in her wardrobe she has a tough time accumulating any savings. So Xi looks on consumer financing as a godsend, and plans “to use the loan to purchase a television set as soon as their doors open.” Xi says, “I consulted with banks about the possibility of getting consumer loans before, but balked at the long approval process a bank loan usually takes. By contrast, loans from financial firms with this new mandate will be available to clients within an hour of completing the application.” Xi believes the consumer loan issued through a special finance firm is a viable way for young people to manage their personal finances, but admits, “Once I take out a loan, I have to spend less on clothes until I pay off the loan.” Young public servant Cui Kai is also positively disposed towards consumer financing. “My income level does not qualify me to apply for a credit card at present, so I expect the consumer finance business may help me to purchase some expensive home appliances with small loans.”

    Nevertheless, opinions weren’t all glowing. Media worker Cui Jia thinks borrow-and-spend does not align with a conventional Chinese lifestyle. “Take travel for example. Some people do not need to apply for loans to travel, whereas some others wouldn’t even consider travelling on loans secured at high interest rates.” Cui Jia continues, “The majority of us will accept a borrow-and-spend arrangement only for very hefty purchases, like a car or house.”

    It’s true the interest rates for consumer loans is quite high, generally speaking. It’s set by the consumer finance company on a case by case basis, with the borrower’s risk rating factored in, and it’s restricted to no more than four times higher than the benchmark interest rate.

A Long Way to Go

    Investment and export are what have been driving China’s economic growth, whereas consumption has always taken a back seat for its low standing of contribution to the GDP. But as the country faces a global downturn, the establishment of consumer financing firms can be regarded as a measure to boost demand at home. The move still has a long way to go to take effect.

    Chen Qiong, deputy director of the CBRC’s non-bank regulatory department, says where consumer finance companies fit in is to help speed up the transition of China’s economy from an investment-driven model to a consumption-driven model. “The establishment of these kinds of companies will effectively expedite personal consumption growth, thus driving increases in the production and sales volumes of manufacturers and retailers, boosting demand in related industries, and eventually altering our over reliance on exports and fixed asset investment for GDP growth.”

Amplifying domestic demand and sustaining economic health is the role of consumer finance companies.                                                China Foto Press