Is consumer debt desirable?#Oriental Outlook#-Sino-US

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Is consumer debt desirable?

What will be the next gold mine of opportunity in China? Many experts will tell you that consumer finance is poised to become one in the booming financial technology sector.

The country’s consumer finance market is expected to grow to $1.6 trillion by the end of 2020, which is equivalent to the gross domestic product of Mexico, with a compound annual growth rate of 18 percent.

Like most business practices, the consumer finance also has some specific problems, such as the credit and fraudulent cases in particular.

In the 42nd issue of 2018, the Oriental Outlook magazine under the Xinhua News Agency ran a cover story on the development of China’s consumer finance market, outlining the regulations and presenting an optimistic outlook on its future.

Below is an excerpt of the article.

Consumption is one of the main driving forces of economic development. The growth of consumption has played an important role in the economic take-off of developed countries.

In the United States, consumption accounted for 60 percent of the gross domestic product in the middle of last century, and in 2017, the rate has grown to 68.4 percent.

In recent years, consumption has also played a key role in China’s economic growth. It has contributed 78 percent of the economic growth in the first three quarters, according to the data published by the National Bureau of Statistics on October 19.

Consumption has replaced investment as the leading growth driver in China. The growing consumer demand will improve the quality of life and promote China's economic transition and upgrading.

Rise in consumption drives economic growth which in turn pushes up individual incomes. This kind of a virtuous circle has gradually been formed in the process of China’s transition to high-quality economic development, with great prospects.

Chinese consumers aged between 18 and 35 have become an important force that cannot be ignored. They demand high-quality consumer goods but are less sensitive to prices. They are more confident in the future economic prospects and income expectations, and more willing to use consumer financial services.

A report on the consumption habits of Chinese youth jointly published by some companies including Everbright Bank showed that 76 percent of people with a monthly income of over 4,000 yuan have credit cards.

Experience shows that consumer finance is a powerful means to expand consumption, but to develop consumer finance in a proper way, the supervision system and risk control system need to be developed and strengthened.

Although China's consumer finance industry started late, it has built some advantages, especially after the country’s Internet-plus strategy was pushed forward, China’s online consumer finance became a leader worldwide.

The whole society has made efforts to crack down on chaotic behavior, and some good platforms, brands and products have emerged from the crowd with advantages in credit system, technologies, capital and services.

Supporting the growth of consumer finance has also become an important part of the country’s policy to steer the economy toward high-quality development.

In September and October, the State Council issued documents on further enhancing finance’s role in promoting consumption, encouraging innovation in consumer finance and standardizing consumer credit.

It is predicted that with further maturity of China's consumer finance system, especially online consumer finance, the spending power of the Chinese people will further increase.

Filling a vacuum

During the National Day holiday, 25-year-old Wang Kai (pseudonym) used a travel product priced at 16,000 yuan from an online platform through the platform’s installment service.

“From application to making a deal and paying the monthly installment – all of it can be done on a mobile app, and it only takes about 10 minutes,” said Wang, who has already ordered another travel product on installment.
With a different attitude toward consumption, people born in 1990s and 2000s have become the main force behind growth of consumption and will play a key role in the future market, said Yin Zhentao, an expert from the Chinese Academy of Social Sciences.

He said these young people have increasing demand for the consumer finance services.

“Consumer finance refers to the finance targeting personal consumption, or providing consumers financial services,” said Cheng Xuejun, another financial expert from CASS.

According to the country’s pilot regulations on consumer finance companies, the consumer finance will not cover home mortgages and auto loans. The products are mainly divided into two categories: scenario-based installment loan and cash loan.

In the traditional financial system, even if people have the advanced consumption will and demand, a majority of young people could not have loans as easily as they want.

“Currently, about 380 million Chinese have credit records in the central bank, and about 200 million of them have credit cards. That means about 1.2 billion people do not have credit cards, and more than 1 billion people have no credit record, about 70 percent of the total population,” Cheng said.

Cheng said that the traditional banks and financial companies were reluctant to offer loans to people without credit records.

Guo Tianyong, a professor from the Central University of Finance and Economics, said that the consumer finance helped young people to ease economic pressure through installment and loans when they just entered the society.

Cheng said that by the end of 2016, Chinese consumer credit accounted for about 16 percent of the consumer spending, rising from 3.6 percent in 2008. However, it was far behind South Korea’s 41 percent and the US’ 30 percent.

“From a macro perspective, China's consumer finance is still in its infancy with a low penetration rate, but this also means that there is huge room for future growth,” Cheng said.

Growing consumer base

Compared with countries where it has developed over about 100 years, China’s consumer finance industry formally took off in 2009.

To offset the effects of the financial crisis, stimulate consumption and boost economic activity, the former banking regulatory commission issued a pilot regulation on consumer finance companies on July 22 that year.

In early 2010, four pilot companies were first set up in Beijing, Tianjin, Shanghai and Chengdu.

The first consumer finance companies were backed by banks due to the regulations on revenue. When the State Council issued new regulations in 2013 to encourage the industry, more companies not backed by banks were set up.

The rise of e-commerce, Internet and mobile payment companies steered the consumer finance market toward rapid development in 2015, Yin Zhentao said.

E-commerce has boosted the demand for consumer goods and financial services, and mobile apps have also made financial services more convenient, such as Tmall and, Yin said.

Yin said that consumer finance, especially the Internet consumer finance, covered the population that personal finance services of traditional banks did not cover, and this group was at least 1 billion people.

In the first half of 2017, major consumer finance companies have seen rapid growth in revenue and net profit, such as Tencent’s Weilidai reaching a scale of 160 billion yuan. At least five companies were listed abroad in the previous years.

Risk control

On October 18, Ant Financial Services Group has set a limit on the amount of loans people could get from its consumer finance service Huabei.

Zhou Yi, a senior manager of Huabei, said, “We never encourage young people to make excessive and high consumption. Huabei expects to provide common financial services to users in a prudent way.”

Guo Tianyong said that “guiding young people to use consumer finance correctly is a risk control for the companies providing installment services and loans, and any company that wants a healthy and sustainable development needs such commercial logic.”

He Guoqiang, a risk control manager from Shanghai-based consumer finance company Mobanker, said that consumer finance covers people with little credit record, and the magnitude of risk in this group will be high.

Cheng Xuejun said that companies have developed more scenario-based products as a major means to improve their competitiveness because with such products it was easier to control risks than cash loans.

To prevent the risks in cash loans, in December 2017, authorities issued a notice on regulating cash loans.

Yin Zhentao said that the risk control mechanism should be well established, and companies should choose those with ability to repay the loans at an early stage of issuing loans.

A manager from China Guangfa Bank’s credit card center said that in the early stage, there were incomplete regulations and some companies lacked systematic procedures in risk control.

The manager said that there are traditional and big data risk control models in the financial field. The traditional mode requires companies to check all information of loan applicants, and it had low efficiency and high cost, therefore not suitable for the large amount of consumer finance applications for small sums of loans.

Now, when users apply for installment and loans from Internet platforms and financial companies, the artificial intelligence, big data and cloud computing will draw accurate images of them.

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