Economy

Markets

Industries

Insights

Reports

Events

Dilemma of saving all too well

By Hu Yuanyuan (China Daily)
Updated: 2009-06-15 08:07

Chinese and foreign bank ATMs stand side by side at a supermarket in Beijing.[Asianewsphoto]

Chinese have long been renowned as for their ability to live within their means, avoid debt and save money, so a daunting challenge for officials and economic planners is now how further prise open consumer wallets.

As exports and investment, two of the three main economic pillars of China's economy, remain lackluster due to the global financial crisis, regulators and advisors are now looking to the final pillar - domestic consumption - to fuel a faster recovery.

Yet despite a record-setting number of new loans in the first quarter, some 4.58 trillion yuan, growth in consumer lending at Chinese banks remains weak.

Industrial and Commercial Bank of China (ICBC), the world's largest bank by market value, extended 52.5 billion yuan worth of loans to consumers in the first quarter, just 8.2 percent of the lender's 636.4 billion yuan in new loans in the first quarter.

The proportion of personal loans at China Construction Bank and Bank of China, the other two of the country's top three State-controlled banks, was similar - 8.6 percent and 8 percent respectively in the first three months.

The latest move to encourage more consumer lending and spending is establishment of consumption financing firms.

New policy

After the China Banking Regulatory Commission issued draft rules on May 12 that allow domestic and foreign financial institutions to establish consumer finance firms to provide personal loans for purchase of durables, some are keen to start.

Related readings:  Oman says cap on personal loans to boost economy  CBRC unveils norms for consumer finance firms  Finance: CBRC for consumer finance firms  China to offer opportunities for finance firms

On May 16, the government of the Pudong New Area in Shanghai's business and financial heart signed a strategic deal with the Bank of China's Shanghai branch to increase consumer financing.

Tan Weixian, deputy director of the Shanghai banking regulatory bureau, said the agency will support Pudong in a pilot project to establish the country's first consumer finance firm.

The 200,000 financial and IT professionals in Pudong have a strong consumption demand, particularly for weddings, education and travel, and are more willing to accept innovative ways of payment.

But some industry insiders doubt consumer finance firms can actually work as hoped.

"Such a business model would not promote personal spending on a big scale," Xu Luode, president of China UnionPay, said at a recent forum in Shanghai.

"The strict limit on the purpose of such loans (for buying durables only) means banks will be unwilling to get involved as they may face higher costs and lower profitability," he said.

According to the recently released draft rules, consumer finance firms will not be allowed to take deposits, offer automobile loans or home mortgage loans. But they are expected to provide loans to consumers faster than banks and can issue loans up to five times an applicant's monthly salary.

To raise lending capital, consumer finance firms can borrow money from banks or issue bonds, but that will make their lending rate less competitive and administrative costs higher. Companies must have at least five years of expertise in consumer lending and their capital adequacy ratio must be no less than 10 percent, said the draft rules.

Xu Han, vice president of the credit card center of Bank of Communications, said room for growth in consumer finance might not be a huge as some project because the service is already mostly covered by credit cards.

Advantage

Compared with credit cards with similar credit lines, which usually require cardholders to repay debt within 50 days, the advantage of personal loans is a longer time for repayment. Otherwise the cost of using credit cards will be lower.

"I don't think I will apply for such loans from consumer finance firms as I have already have three credit cards with credit lines up to 50,000 yuan each," said Wang Qian, a 29-year-old company executive. "In fact, I don't think I would bother to finance the purchase of a refrigerator or TV."

A manager of a shareholding bank's individual finance department said banks might not applaud establishment of consumer finance firms because they could take customers from existing credit card operations.

Actually a number of banks have already quickened efforts in financing for individual consumption.

China UnionPay, together with 23 Chinese commercial banks, just launched a marketing campaign to encourage people to pay with credit and debit cards, the biggest-ever promotional campaign of its kind.

They will pour 7 million yuan into the campaign, offering 30,000 prizes for customers using bankcards with the UnionPay logo in the next seven months.

According to China UnionPay's Xu, credit cards could play an even bigger role in consumer spending.

To better stimulate consumption, China could consider establishing an independent credit card company under a financial holding firm as in other developed countries, said Luo.

But some financial experts contend any real boost in consumption will only come after China improves the social welfare framework.

China has a household savings ratio of around a quarter of disposable income. But amid fears that old age or a debilitating illness will lead to financial ruin, many Chinese prefer to hold onto savings, said Zhao Xijun, financial professor with the Renmin University of China.