The Rise of Consumer Finance in China to Bolster Consumption

Fitch Ratings expects rising consumer lending activity in China to support consumption growth, despite near-term regulatory tightening for online microloans (OM). Corporates’ increasing exposure to consumer lending activities may increase their credit risk and lead to additional capital needs for their financial service operations.

Consumer credit is an important growth driver for China’s consumer spending. Its contribution to overall retail sales more than doubled to 32% in 2019, from 15% in 2014, to far exceed retail sales growth, which has decelerated to 8%, from 12%, over the same period. By sector, home appliances has the largest share of loan proceeds, at 26%, following by education training at 16%, home decoration at 14% and travel expenses at 10%.

The People’s Bank of China reports that short-term consumption loans from financial institutions, excluding entities that are not regulated by the China Banking and Insurance Regulatory Commission, tripled between 2014 and 2019, despite declined sharply in early 2020 due to the coronavirus pandemic. We believe consumer loans granted by microlending companies that are licensed by local governments, including those under internet conglomerates, have also seen aggressive growth given less stringent regulatory oversight.

We estimate that online consumer loans account for half of overall consumer loans in China and facilitated the country’s credit extension, particularly among the young population. A survey conducted by Tsinghua University Research Institute shows that 66% of OM users are under the age of 39; such loans are easier and faster to access and allow financing for advanced purchases of big-ticket consumer items.

The online lending industry’s fast development and rising importance to the economy prompted the government to tighten the regulation of OM companies in 2020, including their qualification, use of leverage and OM-backed asset-backed securities, for more sustainable growth. We expect regulatory tightening to slow near-term online consumer loan growth, although other types of consumer lending should continue to increase on rising demand and low penetration. Corporates that rely on boosting sales by extending consumer credit might see slower growth and large ticket-size consumer categories may also be affected in light of their higher usage of consumer loans.

However, the overall impact on retail sales is likely to be limited, as further penetration of household ownerships and China’s rising consumption trend should support consumption in the long run. We also believe China’s consumer credit market remains under-penetrated. We expect consumer credit to play an important role in consumption growth, particularly through online penetration. Over 70% of China’s population aged 18 years and above did not own a credit card in 2019. Meanwhile, the ratio of consumer credit/cash, an indicator of consumer leverage, remains manageable at 14%, slightly higher than Germany’s 13%, but lower than the US’s 33%. That said, China’s rapid pace of consumer credit growth to around 13% of GDP in 2019, from around 5% in 2013, warrants caution, as personal bankruptcy laws in China are less developed than in the US.

Many microloan and consumer finance companies are established by consumer goods companies, retailers and internet conglomerates to boost customer demand and stickiness. Corporates’ increasing exposure to consumer lending may point to additional capital needs and credit risk for their financial service operations. Fitch’s Corporate Rating Criteria requires companies with a financial service unit as an integral part of its business operation to be analysed on a consolidated basis; the financial service unit may be deconsolidated if the debt allocated to the financial service operation is repaid using cash flow of the financial service operation.
Source: Fitch Ratings