1、1Padded Pockets to the RescueLook to Consumer Finance Companies for Economic Hope 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 automob
2、iles dont 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 borrowers monthly income. The first batch of these companie
3、s 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
4、still remains to be seen. Certain kinds of consumers see benefits. Xi Jingjing works 2in 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
5、 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
6、 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 Ipay off the loan.” Young publ
7、ic 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 werent all
8、 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 3others wouldnt even consider travelling on loans secured at high interest rates.” Cui Jia continu
9、es, “The majority of us will accept a borrow-and-spend arrangement only for very hefty purchases, like a car or house.” Its true the interest rates for consumer loans is quite high, generally speaking. Its set by the consumer finance company on a case by case basis, with the borrowers risk rating fa
10、ctored in, and its 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 Chinas economic growth, whereas consumption has always taken a back seat for its low standing of contribution to the GDP. But as the cou
11、ntry 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 CBRCs non-bank regulatory department, says where consumer finance companies fit in
12、is to help speed up the transition of Chinas economy 4from 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 r
13、etailers, boosting demand in related industries, and eventually altering our over reliance on exports and fixed asset investment for GDP growth.” Easier said than done. Compared with Western countries, Chinas consumer financing market is underdeveloped. Before the launch of the new financing options
14、, only commercial banks and auto financing institutions offered consumer lending ?C mainly in the form of mortgage loans, credit cards, and auto loans. Currently consumer loans account for less than 12 percent of the countrys total credit margin ?C which begs the question of how much can be accompli
15、shed 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. “Hou
16、sing 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 5prove 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
17、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 Morgans China equities and commodities business, Chinas under consumption can be attributed to the predominance of limited
18、 incomes, a social security system not yet completely established, and the high costs of medical treatment, old-age care, education and housing ?C spending that calls for savings. The resulting cautious attitude towards consumption wont be replaced by confidence and soaring domestic demand overnight
19、. 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 governments determination to expand domestic demand and adjust an economic structure that is outliving its usefulness.” Risk
20、 Management To start with,since its credit operations are unsecured, a 6consumer 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 compli
21、cate 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 importanc
22、e 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 pre
23、vention,” 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
24、 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 7loan 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.
