Reference source: JSTOR

China's fast-evolving consumer finance market

Contents

1. Footnote

China's consumer finance industry lags far behind the economy as a whole. In 2007, consumer finance balances still came to less than 13 percent of GDP, below India and far below Singapore and South Korea. Should recent growth rates persist, consumer lending promises to exceed 8 trillion renminbi ($1.2 trillion) by 2014, up from today's 3.7 trillion renminbi.(n1) But that calculation understates the market's latent potential. If consumer lending on the mainland rose to Taiwan's level, for instance, the shift could unleash as much as 10 trillion renminbi in net new consumption over the next five years--an enormous opportunity for banks and retailers.

China's people now have limited credit options. Mortgages account for 90 percent of lending to consumers, who have few choices in key product areas, such as auto loans, credit cards, and personal loans. But the market has grown rapidly in recent years. Credit card issuance is skyrocketing, from 3 million cards in 2003 to 128 million by the end of 2008. Indeed , card issuance could surpass 300 million by 2013. Similarly, unsecured personal loans and installment loans, long the domain of underground lenders, have grown at an annual rate of 33 percent since 2006, to 744 billion renminbi, as leading domestic banks and consumer finance specialists strengthened their risk-management capabilities.

For foreign and local lenders jockeying for position in China's fast-evolving consumer finance market, we see several keys to success.

1. Recognize the market's diversity. China is a collection of local markets, each at a different stage of development, with distinct risk profiles and unique consumer preferences. These markets generally evolve through three stages of development: nascent (such as Sichuan), emerging (Jiangsu), and maturing (Shanghai). Lenders should take a portfolio view, focusing on the most promising markets, but with enough diversity to capture the next wave of growth.

2. Find a product portfolio that matches consumer preferences. In a sense, consumer-lending products are fungible. Many consumers balance their savings and borrowing in the aggregate, not by individual products. Some countries (such as South Korea) have high levels of credit card usage; others rely more on cash and personal loans. In the present early stage, the ultimate product balance in China remains to be determined. Finding the right mix may prove crucial to success in China's fast-growing market.

3. Know the rules and their evolution. New regulations issued by Chinese banking regulators in the spring of 2009 give local and foreign banks and consumer finance specialists greater access to the market, in the form of consumer finance companies. While initially restricted to offering installment loans to retail customers with previous track records in borrowing, su

ch companies will probably enable attackers to participate in the unsecured consumer-lending sector more quickly and at greater scale. In addition, the further deregulation of credit cards has allowed overseas banks to issue renminbi-based ones. These banks should target clear segments and develop the ability to serve the broader market.

Would-be players in such a new market must tread carefully. To assure responsible lending and borrowing, the government must strengthen credit bureaus, improve financial education, support 'new to credit' products (for instance, low-limit or collateralized credit cards), and allow consumer finance balances to be securitized. Regulators and lenders must work together to improve risk management, especially the ability to identify and address organized fraud. The government must become better at spotting national and local credit bubbles.

China can manage the risks and has ample room to expand consumer credit--safely.

China's rapidly developing consumer finance market

Content

1. Footnotes

China’s consumer finance industry lags far behind the overall economy. In 2007, consumer credit balances still accounted for less than 13 percent of GDP, lower than India and far lower than Singapore and South Korea. If recent growth rates continue, consumer loan commitments will exceed 8 trillion yuan ($1.2 trillion) in 2014, up from 3.7 trillion yuan today. (n1) Heavy calculation, but underestimated the potential of the market. If consumer lending in mainland China rises to levels in Taiwan, for example, this change could trigger as much as 10 trillion yuan in net new spending over the next five years - a huge opportunity for banks and retailers.

The Chinese people now have limited credit options. Mortgages account for 90 percent of loans to consumers, who have several choices in key product areas such as auto loans, credit cards, and personal loans. But the market has developed rapidly in recent years. Credit card issuance has skyrocketed from 30,003 cards in 2003 to 1.28 million by the end of 2008. In fact, the number of cards issued may exceed 300 million by 2013. Likewise, unsecured personal loans and installment loans, the underground segment of long-term loans, grew 33 percent in one-year growth since 2006 to 74.4 billion yuan as the country's leading bank and consumer finance specialist strengthens its Risk management capabilities.

In the race for foreign and local lending leadership in China's rapidly growing consumer finance market, we see some keys to success.

1. Recognize the diversity of the market. China is a collection of local markets, each at a different stage of development, with different risk profiles and unique consumer preferences. These markets generally develop through three stages of development: nascent (such as Sichuan), emerging (Jiangsu), and mature (Shanghai). Lenders should take a portfolio view that is focused on the most promising markets but with enough diversity to capture the next wave of developments.

2. Find product combinations that match consumer preferences. In a sense, consumer credit products are interchangeable. Many consumers balance savings and borrowing by individual products instead of totals. Some countries (such as South Korea) have high levels of credit card usage; others rely more on cash and personal loans. At this early stage, the final product balance in China has yet to be determined. Finding the right mix can be extremely important to succeed in China's fast-growing market.

3. Know the rules and their evolution. New regulations were issued by China's banking regulator in the spring of 2009 to give local and foreign banks and consumer finance experts freer access to the market, in the form of consumer finance companies. While initially limited to offering installment loans to retail customers with pre-loan records, these companies will likely enable attackers to participate in the unsecured consumer lending sector more quickly and on a larger scale. In addition, further deregulation of credit cards has allowed foreign banks to issue yuan-based credit cards. These banks should target clear sectors and develop capabilities to serve broad markets.

Becoming such a new market participant must proceed with caution. To ensure responsible lending and borrowing, governments must strengthen credit bureaus, improve financial education, support new credit products (e.g., low-limit or secured credit cards), and allow consumers to securitize financing balances. Regulators and lenders must work together to improve risk management, particularly to identify and deal with organized fraud. Governments need to do a better job of detecting credit bubbles at the national and local levels.

China can manage risks and has enough room to expand consumer credit - safely.