In this section, two issues are discussed: the players in China’s consumer finance market and their way of financing.
In China’s consumer finance market, there are three main types of players: commercial banks, licensed consumer finance companies, and Internet-based consumer finance platforms.
First, we will discuss commercial banks (mainly joint-stock commercial banks and urban commercial banks).Footnote 3 The development of commercial banks’ consumer finance offerings has mainly been driven by changing operational environments (Tsinghua University 2019). For example, after the interest rate liberalization of 2015 (Liu 2017), Chinese commercial banks faced greater challenges when dealing with corporate and institutional clients. Additionally, Chinese commercial banks’ nonperforming loan (NPL) ratio rose from 0.9% in Q3 2011 to 1.8% in Q4 2018. Finally, according to the Administrative Measures for the Capital of Commercial Banks (for Trial Implementation) (CBRC 2012), the risk weight for corporate loans was 100% while only 75% for personal loans, meaning that more corporate loan businesses would exert more pressure on the capital adequacy indicator.
Commercial banks provide consumer finance services mainly through credit cards and consumer loans.Footnote 4 Accordingly, commercial banks mainly expand their consumer finance businesses by issuing more credit cards and more consumer loans. The number of credit cards issued in China increased from 143 million in 2008 to 455 million in 2014, and the number of credit/debit cards issued increased from 433 million in Q2 2015 to 711 million in Q2 2019.Footnote 5 At the end of Q4 2018, the total credits payable from credit cards was RMB 6.85 trillion; just 10 years ago, the figure was just RMB 245.8 billion, making the compounded annual growth rate from 2008 to 2018 45.8%.Footnote 6 Consumer loans also expanded, primarily in the form of diversified consumer loan products, following the upgrades in financial technology. Commercial banks dominate the Chinese consumer finance market.
Commercial banks have their own advantages in the consumer finance market—low cost of capital, a large pool of clients, numerous branches, and mature risk management practices—but they have disadvantages as well. For example, their threshold of consumer loans is higher than those of licensed consumer finance companies and Internet-based consumer finance platforms.
Licensed consumer finance companies
In China, a licensed consumer finance company is a nonbanking financial institution that has been approved by the CBIRC; has its business operations under comprehensive supervision of the CBIRC; and specializes in the personal consumer loan business. Licensed consumer finance companies can absorb deposits from shareholders, borrow from China’s interbank market, and issue financial bonds (after approval). However, they also must strictly operate within the scope defined by the Pilot Management Measures for Consumer Finance Companies (CBRC 2013). This can place licensed consumer finance companies at a disadvantage compared with others—especially Internet-based consumer finance platforms. Compared with commercial banks, licensed consumer finance companies issue smaller loans but can issue them quicker and with lower collateral requirements.
Consumer finance companies provide consumer loans mainly in two ways: (1) cooperation with merchants in the consumer finance business and loans directly paid to merchants that provide goods or services to consumers; and (2) direct loans to consumers. The first loan type mainly covers personal durable consumer goods such as household appliances, electronic products, and other durable consumer goods (excluding houses and cars). The second loan type covers personal uses and services, such as travel, weddings, education, renovations, and the like. Regardless of loan type, consumer finance companies that offer a combination of online and offline models are generally more competitive.
As of June 2019, there were 25 licensed consumer finance companies, including one in the process of approval (see Appendix Table 1). In accordance with the Pilot Management Measures for Consumer Finance Companies (2013) (CBRC 2013), they have both main shareholders and general shareholders: Main shareholders must hold at least 30% of the shares and the total assets of the main shareholders’ from the previous financial year must not less than RMB60 billion Among those 26 licensed consumer finance companies, at least 20 had commercial banks as their main shareholders. The largest consumer finance company by registered capital in June 2019 was Home Credit Consumer Finance.
Internet-based platforms provide consumer finance products and services online. They generally do not have consumer finance licenses or any licenses at all although some own microloan licenses. These companies can be divided into three categories: e-commerce platforms, vertical installment online platforms, and online microloan platforms. China’s e-commerce platforms include JD.com (NASDAQ: JD), one of two massive Business to Customer online retailers in China by transaction volume and revenue, a member of the Fortune Global 500, and a major competitor to Tmall (run by Alibaba Group). Advantages enjoyed by e-commerce platforms include almost zero cost for obtaining customers and more efficient risk-management practices thanks to the availability of massive transaction data. China’s vertical installment online platforms include Qudian (NYSE: QD), which targets college students and young white-collar workers buying laptops, smartphones, and other consumer electronics, and various other vertical platforms with niche positioning such as tourism, education, medical cosmetics (e.g., plastic surgery, dermatology, and cosmetic dentistry, etc.), housing, and so on. The advantages enjoyed by vertical installment online platforms are the depth and breadth of their access to specialty knowledge in a specific area, but they have the disadvantage of lacking historical transaction data for credit assessment. An example of China’s online microloan platforms is Yirendai (NYSE: YRD). Compared with other consumer finance providers, online microloan platforms have higher capital costs, smaller customer pools, and less access to transaction data, so they mainly position themselves as providers of cash loans and microloans, and charge much higher interest rates.
As argued by CCWE (2019), Internet-based platforms have improved the efficiency of consumer finance by digitalizing the overall process. E-commerce platforms could further improve their efficiency by better integrating their own sales channels, and vertical installment online platforms could improve their efficiency by performing more detailed analyses in their vertical fields. For online microloan platforms, the major risk comes from regulation and the conflict between the need to expand and compliance risk.
Capital can come from many sources. Commercial banks have the lowest capital costs because they rely mainly on deposits. According to the Pilot Management Measures for Consumer Finance Companies (2013) (CBRC 2013), in addition to registered capital, licensed consumer finance companies can rely on shareholder deposits, interbank borrowing, borrowing from onshore financial institutions, issuing financial bonds, and other ways that need prior approval from the CBRC (now CBRIC). Furthermore, the interbank borrowing cannot be more than 100% of their net capital. The e-commerce platforms rely mainly on registered capital and issuing asset-backed securities (ABS), as do the vertical installment online platforms. The online microloan platforms mainly reply on P2P, making its cost of capital the highest.
The total registered capital for the 26 licensed consumer finance companies was RMB 28.2 billion (equivalent to around USD 4.3 billionFootnote 7) in April 2019. Furthermore, based on an incomplete list compiled by Bairong, Inc. and Tsinghua University of entities with investments of more than RMB100 million in the consumer finance industry, the investments during 2015–2017 totaled at least USD1.6 billion.Footnote 8 Moreover, many companies chose to finance their domestic expansion through public offerings. Between 2010 and May 2019, there were 14 Chinese consumer finance companies listed in the United States, and the total proceeds from IPOs were USD1.64 billion (see Appendix Table 2).
Financial bonds are securities issued by financial institutions in China’s national interbank bond market. Although the Pilot Management Measures for Consumer Finance Companies (2013) (CBRC 2013) stipulated that licensed consumer finance companies could issue financial bonds, doing so still requires approval from regulatory authorities. According to the Administrative Measures for the Issuance of Financial Bonds in the National Inter-bank Bond Market (PBOC 2005), issued by the People’s Bank of China (PBOC; China’s central bank), the criteria for issuing financial bonds have not yet been worked out for financial institutions other than policy banks, commercial banks, and corporate group finance companies. Therefore, issuing financial bonds to raise capital to finance consumer finance companies’ expansion still occurs on a case-by-case basis. As of June 26, 2019, there were only three financial bond issuances from consumer finance companies: two from Bank of China Consumer Finance (one for RMB2 billion in 2016 and one for RMB1.5 billion in 2018) and one from Home Credit Consumer Finance (an RMB2 billion issuance in 2019).
At present, there are three types of ABS related to consumer finance. The first is credit card-backed securities, which are mainly issued by various commercial banks. As of June 26, 2019, proceeds from ABS issues totaled RMB261.3 billion. The second type of ABS is consumer loan-backed securities, which are mainly issued by licensed consumer finance companies and some commercial banks. The Pilot Management Measures for Consumer Finance Companies (2013) (CBRC 2013) stipulated that licensed consumer finance companies could operate other businesses that had been approved by the CBRC (now CBIRC). Regarding the financing sources, recently licensed consumer finance companies are now approved to issue consumer loans-backed securities. As of June 26, 2019, proceeds from consumer loans-backed securities totaled RMB70.7 billion. The third type of ABS is microloan-backed securities. The reason for distinguishing microloans from consumer loans is that issuing them requires different licenses. The microloan license is issued by provincial regulatory authorities but under stricter restrictions on leverage than those governing consumer finance companies. For example, according to the Guiding Opinions on the Pilot Operation of Small-Sum Loan Companies Pilot issued by the (CBRC and the PBOC 2008), the balance of a microloan company’s borrowing from banking financial institutions cannot exceed 50% of its net capital; that fraction is 100% for licensed consumer finance companies. Furthermore, microloan firms have fewer financing sources than licensed consumer finance companies. As of June 26, 2019, proceeds from issuing microloan-backed securities totaled RMB532.7 billion. Among them was an RMB486.3 billion (i.e., 91.3%) issuance from Ant Financial, an affiliate of Alibaba Group, one of the world’s largest retailer and e-commerce company. This shows the dominant position of the e-commerce giant in issuing microloan-based securities.Footnote 9
However, whether entities are issuing financial bonds or ABS or borrowing from the interbank market, they all need approval from Chinese governments. Chinese consumer finance companies, which face heavy regulations in terms of financing, need to explore more ways of financing. One important consideration when adopting different financing channels is the cost of financing.Footnote 10
This section discusses three types of consumer finance firms—commercial banks, licensed consumer finance companies, and Internet-based consumer finance platforms—including their business models, target markets, and financing. Comparisons with consumer finance firms in other developed markets, such as the U.S. market, reveal both similarities and differences. For example, from 1945 to 2010, U.S. consumer finance markets experienced significant evolutions, including an increasing number of products, broadening participation of consumers in the financial sector, increasing consumer responsibility, and greater risks from consumer decisions (Trumbull and Tufano 2011). The Chinese market has been experiencing similar trends, but with several differences. For example, the growth in personal consumption followed increases in income and personal wealth (disposable income) in the United States; the ratio of household consumption to disposable personal income was almost stable from 1950 to 2010. In China, however, consumer loans grew at a much higher rate than disposable income. In the United States, do-it-yourself (DIY) finance has expanded, diversified, matured, and grown increasingly innovative, but DIY finance in China is still in its early stages.