Consumption loans: Will Chinese actually finance?

The China Banking Regulatory Commission recently issued draft rules that allow domestic and foreign financial institutions to set up consumer finance firms to offer personal loans to buy durables. A one-month period for public feedback ended on June 12.

Consumer finance companies will not be allowed to take deposits or provide home mortgages and auto loans. But they are expected to offer loans faster than banks and can issue loans of up to five times an applicant's monthly salary. They will also give customers longer repayment times than credit cards, which usually require cardholders to repay within 50 days. To establish a consumer finance company, applicants are required to have at least five years' experience in consumer lending and have at least 800 million yuan in assets.

The move is the latest effort by the authorities to spur domestic consumption, as exports remain lackluster due to the global financial crisis.

But some doubt whether the firms can actually spark a domestic spending spree, as the Chinese are reported to have an aversion to debt and a high rate of personal saving in part driven by concerns about the lack of a comprehensive social security net.

Experts and consumers expressed their views on the websites of 21st Century Business Herald, People's Daily and Xinmin.cn:

PROS

Huang Ming, professor at the Cheung Kong Graduate School of Business

"The establishment of consumer finance companies will have a positive impact on spurring domestic consumption. Different from credit cards, consumer financing can target specific products, which will spur the industrial growth of manufacturing such products."

ljy0379, a netizen at 21st Century Business Herald

"The new policy will not only help transform our economic growth from investment-driven to consumption-driven, but also diversify China's financial service products."

Netizen from Shanghai

"Traditionally Chinese people think it is 'losing face' to borrow money, even from banks. In fact getting loans from consumer finance companies does not necessarily mean that we are poor and cannot afford such consumption. We can then use our cash for investment. It could be a smart tool for money management."

CONS

Cuebwei, a netizen at 21st Century Business Herald

"Credit cards are already doing the job. What's the meaning of setting up consumer finance firms? I hope they will not end up becoming usury companies or a hotbed for crime."

Xu Han, deputy CEO of credit card center at the Bank of Communications

"I doubt if there is still enough room for the growth of consumer finance companies because with the fast development of plastic purchases (credit cards) in China, banks have diversified their credit card services, which, to some degree, have covered most of the business scope of consumer finance companies."

Netizen from Chengdu

"I won't try such a service. Why would I bother to get loans to buy electric home appliances or fund leisure travel if I can afford them? I would have to pay interest. Some people even suggest these companies can finance wedding ceremonies and honeymoons. That is even more ridiculous! I can't imagine somebody would borrow money to get married."

(China Daily 07/06/2009 page2)