Financing the Next Stage of China’s Development with Consumer Credit

Written by Tom Orlik, Bloomberg’s North Asia economist based in Beijing, and Fielding Chen, a Bloomberg economist based in Hong Kong, this memo surveys the state of China’s consumer credit markets and explains why a better system could yield opportunities, both for households and for China’s overall economy. In its last section, the memo makes topline policy recommendations to Chinese regulators and policymakers concerned with financial sector reform, aiming to maximize the growth potential of consumer credit while tamping down financial risks.

Orlik and Chen note that China is already making rapid strides in the development of its consumer credit market. Still, the lesson from international experience is that higher consumer lending does not always drive economic rebalancing and sometimes poses risks to financial stability. A more diverse consumer finance system, they argue—one that provides greater access to credit for low and middle income households—would maximize the benefits for China.

Orlik and Chen also highlight a number of risks, not just opportunities. For one, slowing income growth and overstretched Chinese banks pose risks to the country’s economic stability. The scope for increasing household borrowing, they argue, has to be understood in the broader context of rapid increases in leverage elsewhere in China’s economy. The period since the 2008 financial crisis has seen super-charged expansion in lending to state owned enterprises, local governments, and real estate developers. In the period from 2008 to 2014 outstanding credit swelled from about 125 percent of GDP to more than 200 percent of GDP. Such a rapid increase in lending has raised fears of frailty in the financial system. The result: households might be able to borrow more, but banks could be hard pressed to lend more without a trade off in slower growth of lending to firms. A longer-term concern, they note, is that the rapid expansion of banks’ loan books is based on the high saving rate of Chinese households, which contributes a steady flow of deposits. An increase in consumer credit, which triggers a move away from saving, would also dent banks’ capacity to lend.

Ultimately, however, Orlik and Chen argue that the data and trend lines suggest that the expansion of consumer credit present an opportunity to drive growth and rebalancing. And China has already started to tap this. Lending to households is growing rapidly from a low base, making a positive contribution to bolstering demand and tilting the economy toward a greater role for household spending.

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