New firms may falter

The China Banking Regulatory Commission released a draft management plan for consumer finance firms last week to get feedback from the public. Consumer finance firms will reportedly begin operating on a trial basis in Beijing, Shanghai, Tianjin and Chengdu, Sichuan province in June. Consumers will be able to get loans to buy household goods and appliances, such as televisions and washing machines, from these firms without any mortgage.

The move is the latest effort by the authorities to spur domestic consumption, which could help drive economic growth and ease the effects of the slowing global economy. But it remains to be seen if the new financial firms can really spark a domestic spending spree.

The Chinese tend to have high personal saving rates. Saving is a trait traditionally valued in Chinese culture but personal savings are also high because of China's spotty social security system. People squirrel money away to pay for health emergencies and education.

It will be hard to convince the public to spend on consumer goods instead of building up bank accounts without major improvements in the country's social security network.

Chinese people seldom borrow to buy ordinary household goods and appliances unless they urgently need them. The global economic downturn has forced high-wage earners in China to tighten their purse strings.

The outlook for the new consumer firms is not rosy.

They also have to deal with risks such as the lack of personal credit records.

The consumer finance firms will not be allowed to attract deposits but will be able to issue bonds and borrow from commercial banks. If they suffer big losses, bond-holders and the banks they borrow from will also suffer, which might affect local economic and social stability.

The banking authorities must be cautious in launching these new businesses.

Guangzhou Daily

(China Daily 05/18/2009 page2)