Consumer finance set to boom in China

Sector shows strong growth potential amid rising domestic consumption

Li Na, a young teacher in Changsha, Hunan province, finally got her iPad 2 recently after making a down payment of 1,800 yuan ($283) and paying monthly installments of 416 yuan over the next year.

"I dreamed about it for a long time and now I can use it. It would take me another half a year if I put aside money from my monthly salary of 2,000 yuan to pay for it," Li said.

The teacher, who doesn't have a credit card, found about the loan - which came with a fee of 25.7 percent of the price the iPad - from a saleswoman at a electronics store.

Li is one of the 1.75 million clients of Home Credit, a Czech financial company that has tapped China's consumer finance market. Analysts say that the market is set to boom in the coming years supported by increasing personal incomes and the government's efforts to expand domestic consumption.

Consumer finance refers to short-term loans for personal purchases of durable goods or services such as home decoration, healthcare and education.

Consumer finance companies are non-banking financial institution providing Chinese residents with loans for consumption purposes. According to China Banking Regulatory Commission rules, these companies are unable to take part in deposit taking business, or provide mortgages or auto loans.

China's consumer finance sector is less developed than in developed economies, but it will be one of the most promising industries in the nation in the near future, said Yan Xuan, president of Nielsen Greater China.

The current penetration of consumer finance in the mainland is quite low, accounting for only about 4 percent of the total consumer lending balance, compared with up to 10 percent in more developed markets such as Hong Kong, according to a report by Boston Consulting Group in August 2011.

"China is now shifting the driving force of its GDP growth from investment to domestic consumption, which will create more room for consumer finance. The consumer finance industry will experience relatively fast development in the next decade," said Sun Tianqi, assistant to the head of the research bureau of the People's Bank of China.

Consumer finance serves as a key component of the government's plan to stimulate overall domestic consumption.

In 2009, the CBRC launched a pilot program approving four consumer finance companies: Bank of Beijing Consumer Finance Co in Beijing, BOC Consumer Finance Co in Shanghai, Jincheng Consumer Finance in Chengdu, and Home Credit in Tianjin.

China's size and its rapidly growing middle class make it an obvious target market for foreign banks. Between them, the country's 1.3 billion citizens hold nearly $2 trillion in personal savings, according to a report by KPMG.

The 21st Century Business Herald cited an unnamed source close to the CBRC as saying that the government will approve a new batch of licenses of consumer finance companies outside of the four pilot cities and the first companies among the new batch are expected to be granted licenses in September.

Policies regarding the regulation of consumer finance business are expected to be adjusted following the announcement of new consumer finance licenses in the second half of this year, according to the newspaper.