China is encouraging small loans to middle and low-income earners as part of its latest effort to boost consumption.
Private capital, foreign and domestic banks and Internet companies will be allowed to set up "consumer credit" firms, which can extend small loans to the public for their retail purchases, the State Council, China's cabinet, said on Wednesday.
China began to pilot consumer credit in 2010 with four financial agencies, including Bank of China Consumer Finance Co., Ltd. and Bank of Beijing Consumer Finance Co., Ltd. The pilot program later expanded to 16 cities.
There are around 10 such firms, which offer loans ranging from several thousand yuan to 200,000 yuan (32,700 U.S. dollars), according to Guo Tianyong, a professor at Central University of Finance and Economics.
"But most of these firms are still bank-backed. There is ample room for development in China's consumer credit market," Guo said.
Statistics from the China Banking Regulatory Commission showed total assets of China's consumer credit industry reached 22.4 billion yuan by the end of 2014, with a net profit of 466 million yuan. It had served 1.35 million consumers.
China's consumer credit market will grow at an annual rate of more than 20 percent from 2014 to 2017, surpassing 27 trillion yuan, iResearch, a leading Chinese research firm, said last year.
Outstanding personal consumption loans in China stood at 7.7 trillion yuan by the end of last year. The figure will rise to 17.5 trillion yuan by 2018, according to the Boston Consulting Group.
E-commerce giants such as Alibaba, JD.com and Suning have already launched similar services, which give consumers access to loans to buy goods on their online shopping sites. The money is repaid in installments.
"Compared to traditional loans offered by banks, loans designed specifically to fund retail purchases are generally small and without the need of guarantees. Such loans are especially handy for people who are either denied of credit cards by banks or whose cards have low credit lines," said Wang Qisheng, chairman of Suning's consumer credit arm.
These e-commerce companies often work with personal credit rating agencies, which rely on big data from the Internet to evaluate if it's safe to grant loans.
China has been searching for ways to spur domestic consumption as traditional economic drivers like exports lose steam and the stuttering economy is threatened by deflationary pressures.
Consumer inflation fell to 1.2 percent in May from 1.5 percent the previous month. The target is to maintain inflation at around 3 percent for the year.
Though falling price levels may be a bonus for consumers in the short term, factories are likely to postpone investment and the prospect of continued price drops means people will hold back on spending.
To encourage domestic spending, China has slashed import duties on consumer goods by an average of 50 percent, starting from June 1. The duty on cosmetics was reduced to 2 percent from 5 percent.
Statistics released by the National Bureau of Statistics on Thursday showed that retail sales in May grew 10.1 percent year on year to 2.42 trillion yuan, a shade up from the 10 percent growth recorded in April.
