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Consumer loans go against the grain
By Zhang Fengming |
September 23, 2009, Wednesday
|
Print Edition
Print Edition
TWO bank-led groups are vying to set up Shanghai's first consumer credit company as China tries to encourage more spending in a country where people wouldn't traditionally borrow money to pay for refrigerators, weddings and overseas trips.
Shanghai, Beijing, Chengdu and Tianjin were selected last month by the central government to start on a trial basis consumer credit companies that will offer loans at cheaper rates than generally available now.
"Consumer credit is a significant step to boost domestic demand as China tries to improve its economic structure," said Lu Zhengwei, the Industrial Bank's senior economist. "The shift is more urgent because China is feeling the pinch of the global credit crunch."
The Chinese are well-known for their frugality. It took years before individual mortgages and auto loans took hold after they were introduced in China about a decade ago.
But now that the global slowdown has impaired exports, China is turning to its consumers to stimulate the economy.
The Bank of China and the Bank of Shanghai are each working with partners to vie for the right to operate the first consumer credit company in Shanghai. Each bank in turn is backed by a district government, complicating the competition. A decision may come by the end of this year.
"Borrowing for daily consumption is still against the grain," said Zuo Xiaolei, China Galaxy Securities Co's chief economist.
"Consumer credit can help shake the Chinese tradition of frugality, but not in a day," she said. "It will take years to see the companies bear fruits."
Indeed, consumer credit companies will have their work cut out for them, trying to convince conservative spenders to take on debt.
"Borrowing for traveling just doesn't make sense for me," said Hua Qi, a 28-year white-collar worker in Shanghai. "I think people need to be careful about their money. Personally, I don't want to end up being chased by loan sharks."
An easier target for new consumer credit companies may be younger buyers.
"China's Y-generation has shown a sea change in spending ideology," said Zuo. "The younger generation is the key for consumer credit companies to succeed but the generation also bears higher risks because they may become spendthrifts."
The Industrial Bank's Lu said lack of databases will be another headache for the new consumer credit agencies seeking to avoid lending to deadbeats.
The Bank of Ningbo, which does limited lending to consumers, handled the problem of risks by restricting loans to employees of governments or Fortune 500 companies.
"Most of our clients won't risk default for fear of being taken to court," said Jiang Wei, deputy president of the Shanghai branch of the Bank of Ningbo. "They will lose face or even jobs if that happens."
Currently, most retail lending in Shanghai involves loans for housing, education and autos. Shopping for household goods or paying for vacations is normally put on a credit card. But most Chinese credit card holders don't roll over their bills. They take advantage of the 50-plus-day interest-free period then pay the money on the due date.
A limited number of banks also offer non-collateral loans but at high rates.
By contrast, the new consumer credit companies will be able to offer bigger loans at lower interest.
They will be allowed to make loans valued up to five times a borrower's monthly salary, while credit cards are generally limited to three times.
The consumer credit companies will also offer loans with rates as low as the one-year benchmark lending rate, which now sits at 5.31 percent.
In the Shanghai markets, interest rates on non-collateral bank loans average between 10 percent and 15 percent annually. Interest rates of credit cards are calculated on a daily basis of 0.05 percent, or a yearly rate of 18 percent.
China has rolled out a raft of measures such as subsidies on auto and home appliance purchases to boost domestic consumption. Shops have also launched unprecedented sales promotions to woo consumers. Retail sales have shown year-on-year growth of around 15 percent each month this year.
Retail sales became the biggest contributor to China's growth in 2007. Consumption accounts for about 40 percent of gross domestic product, compared with about 70 percent in the United States.
"The lack of sufficient financing channels has thwarted further growth of domestic consumption, triggering the go-ahead for consumer credit companies," Lu said.
The Bank of China is preparing its final plan to set up a consumer credit company in Pudong New Area with associate shareholders.
"The credit company enjoys bright prospects based on Pudong's huge base of financial institutions because the professionals who work there are more likely to accept the idea of consumer credit," said a Pudong official who declined to be identified.
The second contender, the Bank of Shanghai, is allied with Huangpu District and Bailian Group, China's largest retail conglomerate, to set up a credit company on the west side of the Huangpu River.
Huangpu District has signed up 43 merchants, including jewelers, restaurants, clubs and shopping malls, as participants.
Shanghai, Beijing, Chengdu and Tianjin were selected last month by the central government to start on a trial basis consumer credit companies that will offer loans at cheaper rates than generally available now.
"Consumer credit is a significant step to boost domestic demand as China tries to improve its economic structure," said Lu Zhengwei, the Industrial Bank's senior economist. "The shift is more urgent because China is feeling the pinch of the global credit crunch."
The Chinese are well-known for their frugality. It took years before individual mortgages and auto loans took hold after they were introduced in China about a decade ago.
But now that the global slowdown has impaired exports, China is turning to its consumers to stimulate the economy.
The Bank of China and the Bank of Shanghai are each working with partners to vie for the right to operate the first consumer credit company in Shanghai. Each bank in turn is backed by a district government, complicating the competition. A decision may come by the end of this year.
"Borrowing for daily consumption is still against the grain," said Zuo Xiaolei, China Galaxy Securities Co's chief economist.
"Consumer credit can help shake the Chinese tradition of frugality, but not in a day," she said. "It will take years to see the companies bear fruits."
Indeed, consumer credit companies will have their work cut out for them, trying to convince conservative spenders to take on debt.
"Borrowing for traveling just doesn't make sense for me," said Hua Qi, a 28-year white-collar worker in Shanghai. "I think people need to be careful about their money. Personally, I don't want to end up being chased by loan sharks."
An easier target for new consumer credit companies may be younger buyers.
"China's Y-generation has shown a sea change in spending ideology," said Zuo. "The younger generation is the key for consumer credit companies to succeed but the generation also bears higher risks because they may become spendthrifts."
The Industrial Bank's Lu said lack of databases will be another headache for the new consumer credit agencies seeking to avoid lending to deadbeats.
The Bank of Ningbo, which does limited lending to consumers, handled the problem of risks by restricting loans to employees of governments or Fortune 500 companies.
"Most of our clients won't risk default for fear of being taken to court," said Jiang Wei, deputy president of the Shanghai branch of the Bank of Ningbo. "They will lose face or even jobs if that happens."
Currently, most retail lending in Shanghai involves loans for housing, education and autos. Shopping for household goods or paying for vacations is normally put on a credit card. But most Chinese credit card holders don't roll over their bills. They take advantage of the 50-plus-day interest-free period then pay the money on the due date.
A limited number of banks also offer non-collateral loans but at high rates.
By contrast, the new consumer credit companies will be able to offer bigger loans at lower interest.
They will be allowed to make loans valued up to five times a borrower's monthly salary, while credit cards are generally limited to three times.
The consumer credit companies will also offer loans with rates as low as the one-year benchmark lending rate, which now sits at 5.31 percent.
In the Shanghai markets, interest rates on non-collateral bank loans average between 10 percent and 15 percent annually. Interest rates of credit cards are calculated on a daily basis of 0.05 percent, or a yearly rate of 18 percent.
China has rolled out a raft of measures such as subsidies on auto and home appliance purchases to boost domestic consumption. Shops have also launched unprecedented sales promotions to woo consumers. Retail sales have shown year-on-year growth of around 15 percent each month this year.
Retail sales became the biggest contributor to China's growth in 2007. Consumption accounts for about 40 percent of gross domestic product, compared with about 70 percent in the United States.
"The lack of sufficient financing channels has thwarted further growth of domestic consumption, triggering the go-ahead for consumer credit companies," Lu said.
The Bank of China is preparing its final plan to set up a consumer credit company in Pudong New Area with associate shareholders.
"The credit company enjoys bright prospects based on Pudong's huge base of financial institutions because the professionals who work there are more likely to accept the idea of consumer credit," said a Pudong official who declined to be identified.
The second contender, the Bank of Shanghai, is allied with Huangpu District and Bailian Group, China's largest retail conglomerate, to set up a credit company on the west side of the Huangpu River.
Huangpu District has signed up 43 merchants, including jewelers, restaurants, clubs and shopping malls, as participants.
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