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Easier said than done. Compared with Western countries, China’s consumer financing market is underdeveloped. Before the launch of the new financing options, only commercial banks and auto financing institutions offered consumer lending – mainly in the form of mortgage loans, credit cards, and auto loans. Currently consumer loans account for less than 12 percent of the country’s total credit margin – which begs the question of how much can be accomplished with this strategy. Guo Tianyong, director of the Institution of the Chinese Banking Industry at the Central University of Finance and Economics, believes that offering more financing channels to common people making relatively ordinary purchases will make a big difference in the long run. “Housing loans in China have reached RMB three trillion. Once consumer loans amount to even 10 percent of this figure, say, RMB 300-400 billion, it will prove to be a dramatic driver of the economy.”
Consumer finance companies, at the very least, offer a convenient method for the average person to get a loan; however, it does not follow that domestic demand will expand on the basis of accessibility to instant cash. According to Li Jing, managing director and chairperson of JP Morgan’s China equities and commodities business, China’s under consumption can be attributed to the predominance of limited incomes, a social security system not yet completely established, and the high costs of medical treatment, old-age care, education and housing – spending that calls for savings. The resulting cautious attitude towards consumption won’t be replaced by confidence and soaring domestic demand overnight. Li Jing is optimistic however and advises, “Although its role in stimulating consumption remains to be seen, the establishment of a consumer finance sector shows the Chinese government’s determination to expand domestic demand and adjust an economic structure that is outliving its usefulness.”
Risk Management
To start with, since its credit operations are unsecured, a consumer finance company runs relatively high risks; but on top of that the business is a novelty in China. The need for development of management, supervisory and administrative capacity in these bodies is pronounced. To complicate matters, the credit information system on individuals is not mature yet in China either. Expectations that they can work with individual credit ratings to approve a loan, and do it quickly, may have to be dampened. Consequently, consumer finance companies must instead place particular importance on setting up effective risk management strategies and strengthening risk prevention methods.
“Consumer finance companies need to test an efficient set of standards for credit analysis and processing, and establish an effective information flow; this underpins all of credit risk management and prevention,” Guo Tianyong says.
In view of the risk factors, CBRC has set up a series of strict regulatory standards to promote the sound development of consumer finance companies. For instance, the proposed finance company is required to maintain a capital adequacy ratio of no less than 10 percent. To prevent the misuse of a general-purpose individual consumption loan, CBRC stipulates that the loan limit should not exceed the maximum of any previous single loan to the loanee, and that such a loan be extended only to customers who have laid down a credibility track record by making timely payments on previous loans. According to the regulatory framework, CBRC will execute its supervisory and administrative roles by submitting consumer finance companies to market access procedures, as well as conducting off-site monitoring and intermittent on-site inspection. |
