At a Samsung smartphone shop in a mall in Shanghai, 31-year-old Lin Wenjie is considering which phone to buy when a saleswoman approaches him with a suggestion.
The saleswoman, who works for consumer lending company Home Credit, tells him she knows how he could pay less up front but get a phone with more storage space. In the end, Mr Lin put down Rmb1,688 ($250) and Home Credit covered the remaining Rmb5,300. “I just had to pay a little up front and I could get the 128 gigabite one,” he says.
Since regulators opened up the consumer finance market three years ago, lenders have deployed hundreds of thousands of salespeople to cash registers and even car parks across China to hand out on-the-spot loans for phones, electronic gadgets and cars.
The pent up demand was huge. Millennial consumers often struggle to obtain loans from traditional lenders and many in smaller cities do not carry plastic in their wallets. This burgeoning market is expected to be worth Rmb3.4tn ($500bn) by 2019, with the rise in consumption expected to help China wean itself off investment-led growth.
“In China’s history, Chinese people tend not to borrow much. Personal debt was seen as a bad thing,” says Oliver Rui, a professor of finance at the China Europe International Business School, noting that China’s household debt has doubled over the past eight years and is widely expected to reach 50 per cent of gross domestic product by the end of the year. “But the young people — the millennials — they are willing to borrow in order to enjoy right now.”
This proliferation of high-interest lending to young consumers, coupled with rapidly climbing household indebtedness, could spell trouble for financial regulators in the future, some experts warn.
“We’ve already worried about municipal debt and then corporate debt, so now it’s household debt that’s come into focus,” says Daniel Morris, senior investment strategist at BNP Paribas Asset Management.
That said, the current level of 45 per cent is not excessive, he notes.
And with a slow rise in US interest rates putting muted pressure on Chinese rates, it is unlikely there will be concerns this year over borrowers’ ability to pay. Rather, increased consumption should decrease China’s reliance on exports as a source of economic growth, he says.
In the fight for customers, an army of hundreds of thousands of salespeople have been deployed. In some shops, up to five different finance groups appear at the point of sales to compete to give unsecured loans to customers. Many companies seek to capture shoppers with zero-interest loans and small down payments.
Home Credit, with 80,000 salespeople across the country, is now the largest consumer financier in China. It has partnered with smartphone makers and major retailers, who subsidise the purchases of the devices, allowing Home to offer zero-interest loans with often just a 20 per cent down payment from the buyer.
The most lucrative part of the company’s business is done following the sale in the shopping centre. Then Home sells consumers online loans with interest rates averaging in the mid-20s. “Most of these people have never borrowed money before,” says Jiri Smejc, Home’s chairman and chief executive. “[The point-of-sales loan] is a customer-acquisition tool and if they perform well then we will be able to offer them more credit later.”
Home Credit’s return on average equity in 2016 was 16.2 per cent, according to a company presentation. Other consumer finance companies agree growth has been explosive. Howard Liu, founder and chief executive of Beijing-based MeiLi Finance Group, says monthly lending reached $2bn in June. The annual rates on MeiLi’s loans run anywhere from 5 per cent to 35 per cent.
“China didn’t have this industry just a few years ago,” says Mr Liu, who employs 15,000 salespeople nationwide. “Before 2014 you could get put in jail for this. Only banks were allowed to lend.”
But while the business has proven highly lucrative, bad practices proliferate. New regulations on China’s peer-to-peer lenders — which connect retail investors with people in need of cash — have encouraged many P2P lenders to push into consumer finance. This creates new risks for both borrowers and lenders, says Li Hao, a vice president at Wecash, a company that helps lenders compute digital credit scores for customers. “Thousands of platforms are now doing online consumer loans. Many don’t have risk-management skills at this point,” Mr Li says.
At the same time, people in need of quick cash have been able to borrow large amounts of money from a several different lenders. “The loan size is small but one consumer could borrow from hundreds of different platforms,” he says, noting that if such behaviour persisted on a wide scale it could present systemic risk.