“No debts, completely carefree” goes an old Chinese saying. But China’s government is now encouraging its citizens to ditch that old mindset and start spending instead.
In an effort to boost domestic consumption, the China Banking Regulatory Commission (CBRC) recently announced a draft plan to allow a raft of new firms to offer consumer finance loans.
According to the draft, consumer finance companies will be allowed to operate on a trial basis in four major cities – Beijing, Shanghai, Tianjin, and Chengdu. Loans will be extended to individuals (without collateral) to buy goods like appliances and electronic products, as well as for spending on travel and education.
Currently there are only two avenues for consumer loans in China: banks and automobile financing companies. So the new scheme hopes to broaden the lending base, especially “to further promote sales of manufacturers and retailers, and help to transfer China’s growth model from export-led to consumption-oriented in the long run,” says Chen Qiong, deputy director with CBRC’s non-banking regulatory department.
The new regulations may fail to excite potential lenders, however. For a start, the interest rate that can be charged is restricted to no more than four times the benchmark rate (currently 4.86%). Loans also cannot exceed five times applicants’ monthly incomes.
Would-be lenders are sceptical that the new service will generate much of a profit. An official at a Shanghai-based bank admitted to the Wall Street Journal that her own bank, which already has its own credit-card business, wouldn’t be launching a new consumer finance unit.
Analysts also worry about the default risks. The loans, after all, are targeted at lower-end borrowers – i.e. those who can’t afford bigger purchases. Meanwhile, administrative costs will be higher since firms will have to attract customers, evaluate risk and collect payment on debt with no collateral.
More importantly the country’s savings habits are deeply rooted ones: in 2007, the Chinese were saving half of their incomes, up 13 percentage points from 2000.
Industry observers are not convinced that consumer finance will attract that many clients. “It’s merely a message from the government about its intention to boost domestic consumption,” said an official at a major state bank. “But who will get into debt to buy a television?”
Some might. Last week the government announced plans to allocate a further Rmb2 billion ($292 million) in subsidies to encourage consumers to replace old appliances. The new-for-old programme, which has been on trial in a few selected cities and provinces, offers a 10% rebate on new appliances – such as televisions and refrigerators – when old ones are traded in. It’s all part of the government’s plan to encourage greater domestic consumption, which accounts for only 35% of China’s GDP, about half of the US level.
So will the new regulation spark a new round of shopping? Some doubt it: “Chinese consumers aren’t short of money, but confidence,” says Ivan Chung, a vice-president and senior analyst with Moody’s.
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