FUELING CONSUMPTION: A customer looks at LED TV sets at a home appliance retailer in Beijing. After Beijing's consumer finance company is set up, he can pay for the TV through installment payments (XINHUA)

Buying refrigerators, washing machines or computers, in addition to paying for a variety of other expenses, will be made easier after consumer credit companies are opened in China later this year. These companies, which have been in operation in Western countries for more than 400 years, will provide an array of lending options to individual consumers.

Earlier this year, the China Banking Regulatory Commission (CBRC) gave the green light to Bank of Beijing, Bank of China and Bank of Chengdu to set up consumer credit companies in Beijing, Shanghai and Chengdu, respectively.

According to the draft rules, the maximum for an individual's consumer credit is limited to five times the client's monthly salary. Loans will allow consumers to buy durable goods, like home appliances, computers and furniture, as well as make payments for education, wedding ceremonies and travel expenses.

In July 2009, the CBRC promulgated consumer finance company trial administrative measures, planning to set up four such companies in the green-lighted cities and Tianjin Municipality. The CBRC said Tianjin's application is still being considered for approval. CBRC sources said several multinational companies have been competing for stakes in the Tianjin-based credit company.

The establishment of the new type of financial institution in China will expedite the transition of the Chinese economy from an export-led model to a consumption-led model, said Chen Qiong, Vice Chairman of the Non-Bank Finance Institution Regulatory Department of the CBRC.

Through these companies, Chen said, the country will be able to facilitate higher levels of personal consumption, which would promote an increase in the production and sales volume of manufacturing and retail companies. It would also alleviate the GDP's excessive reliance on exports and fixed asset investments.

Several advantages of the consumer finance companies stand out, Chen said. Since these companies will be focused on providing small loans, the approval procedures will be made more convenient for consumers. And since the finance companies will specialize in consumer credit, consumers won't have to worry about running into the same obstacles when dealing with larger banks.

"Young couple with small savings but stable monthly incomes can turn to consumer finance companies to fund their needs," said Chen, adding that the target clients of the new companies could be low- and medium-income groups.

Long before the introduction of consumer finance companies, major commercial banks were already making efforts to entice consumers to purchase durable goods on credit. Along with monthly credit card statements, banks typically attached advertisements for new mobile phones and laptops that could be paid for in installment payments.

"The consumer finance company is a test for the financial institutions' innovative ability and also a challenge to the people's consumption habits," said Zeng Gang, a banking researcher at the Chinese Academy of Social Sciences.

As opposed to larger banks' inexperience or unwillingness to set up consumer finance companies, smaller banks show more enthusiasm in providing consumer credit.

Bank of Chengdu brought overseas strategic investors into the mix of its consumption company. Zeng said small city commercial banks are usually less experienced in developing credit businesses, while overseas investors can provide more useful advice on risk control, management and product design.

According to a report released by the People's Bank of China Shanghai headquarters on January 18, personal consumption loans in Shanghai (excluding housing loans) accounted for less than 2 percent of all loans provided by banks to both companies and individuals in 2009.

A major challenge facing the finance companies will be convincing the residents to utilize the consumer credit service. For centuries, the Chinese have lived within their means. If anything, the global financial crisis has made a fine example of what reckless spending can lead to, as is the case with the American consumer.

But before opening for business, the credit companies will also have to provide clarity to their consumer services. Already, confusion abounds. When asked if he will take out a loan from a finance company to buy durable goods, Jiang Chao, a 31-year-old engineer at a state-owned enterprise in Beijing, raised a query, "What is a consumer finance company?"

Jiang said he would not consider taking out a loan from the bank for anything except real estate.

"I hate the feeling of waking up in the morning, thinking about how much I owe the bank!" Jiang said. Like most people his age, Jiang is reluctant to buy things using bank loans.

Zeng said the citizens will get accustomed to consumer finance companies, and as time progresses with service innovations, these companies will eventually win over more customers.

The First Three Consumer Credit Providers

Beiyin Consumer Finance Co., with a registered capital of 300 million yuan ($44 million), is solely funded by Bank of Beijing.

Zhongyin Consumer Finance Co., with a registered capital of 500 million yuan ($73 million), will be set up in Shanghai in July this year at the latest. Bank of China holds a 51-percent stake, while Bailian Group owns 30 percent. Lujiazui Finance & Trade Zone Development Co. Ltd. holds the remaining stake.

Sichuan Jincheng Consumer Finance Co. Ltd., with registered capital of 320 million yuan ($47 million), is jointly funded by Bank of Chengdu and Hong Leong Bank of Malaysia, which hold 51 percent and 49 percent of the total stake, respectively.