NEW FRONTIERS: A bank in Hefei, capital of Anhui Province, now offers consumer credit services as part of its day-to-day operations
China will establish consumer finance companies in Beijing, Shanghai, Tianjin and Chengdu on a trial basis, announced the China Banking Regulatory Commission (CBRC) on August 13. These companies will be allowed to provide loans to finance purchases of durable goods and other consumer expenditures, with the exception of home and auto purchases, according to the CBRC.
Consumer finance companies have already demonstrated China's ability to float domestic demand since the financial crisis hit export markets. Will the new policy pay off as predicted? Zuo Xiaolei, Chief Economist with Galaxy Securities Co. Ltd. offered insights to the Shanghai-based China Securities Journal on August 19. Edited excerpts follow:
Consumer credit is an important tool with which Beijing can shore up domestic consumption growth. But will it pay off as soon as this or next year?
From a trial stage to nationwide implementation to achieve the twin goals of consumption increase and economic growth, the consumer finance companies, in my view, need to wait a much longer time.
But the launch of consumer finance trial stages has also denoted that the government will employ more economic stimulus policies to maintain growth, optimize structure and improve people's livelihoods.
In the meantime, we should carefully analyze the impacts and effects of these policies and try to seize opportunities for investment therein.
Consumer financial services, like credit cards and home and auto mortgage loans provided by banks, are hardly new to China. But services provided by consumer finance is something new for Chinese citizens, and is of great significance.
The launch of consumer finance companies represents a step forward for China's financial sector to open up to domestic investment in the wake of small credit-financing companies launched in 2005 on a trial basis.
According to the CBRC, domestic private investment institutions are allowed to register as finance companies. Although barred from accepting deposits and initially reliant on their own capital, private investment firms will be endowed with a bigger development space in the financial industry within areas traditionally dominated by state-owned capital.
The participation of private investment in the competition for financial services will enhance the financial industry's overall performance. Customers will get better service, while consumer finance companies will become open to foreign investment.
The opening of the financial industry to private investment is expected to play an active role in maintaining economic growth. With registered capital of at least 300 million yuan ($44 million), consumer finance companies will attract huge investment both from home and abroad. Indeed, if the pilot projects successfully spread nationwide, the financial industry will witness a great expansion in its total value.
Overall, monopolies do not have an oversupply. For the financial industry, as a monopoly, its value expansion implies an increase in production capacity—one that will not produce any negative effects on the economy. Yet consumer finance has also filled a void in China's financial industry.