Special Report

China Consumer Credit: Shop till we drop

by Patricia Cheng / Apr 10, 2018

SHARE

Online borrowing binge in full swing
China’s consumption story does not just benefit retail and ecommerce companies. Unsecured consumer credit, branded under the ‘new economy’ label, is booming, with lenders promising money for the latest smartphone at the click of a mouse or tap of a screen. Ease and accessibility has fuelled growth, and a host of potential problems, such as the validity of social data in underwriting, and issuing loans to students, or individuals with no proof of income. These do not just cast doubt on new players’ risk management – the social ramifications also leave the door open for further crackdowns by Beijing.

Households adding more leverage since 2008
Retail lending in China has surged sevenfold since 2008, outpacing corporate borrowing every single year. However, the biggest debt is in bricks and mortar, with mortgages comprising 71% of the retail book. Consumer credit in the pure consumption context is underprovided by traditional banks.

A lucrative business with over 30% APR
As consumption shifts online, so does lending, giving rise to a new group of players, from P2P platforms to microfinance companies and private banks. Many promise near-instant loan approvals at the click of a mouse or tap of the screen. Giving credit to the young or those without established careers is lucrative. The small guys have a bigger risk appetite, and charge over 30% APR (annual percent rate; the less legitimate can charge over 100%), while the larger ones charge close to 20%.

Largest online lenders backed by internet giants
Internet giants dominate the space. The captive user base provides a deep well of potential borrowers. Though JD was the pioneer of the instalment-payment system, on the back of ecommerce, Alibaba has been catching up fast. The latter has two main loan products – one linked to shopping, and the other not tied to any purchase or use. Tencent has also joined the fray, supporting active consumers’ aspirations for a better lifestyle. Customer acquisition has been the most difficult and costly in financial services. Internet companies can do a lot more for a lot less.