Article by David Olsson and Tracy Chan
Originally Published 25th May 2009
China plans to introduce a pilot scheme allowing the establishment of domestic and foreign-invested consumer finance companies in 4 major cities - Beijing, Shanghai, Chengdu and Tianjin. The China Banking Regulatory Commission (CBRC), the national banking supervisory body, has issued Draft Measures on Managing Trial Consumer Finance Companies (Draft Law) for public consultation for one month.
The primary purpose of the Draft Law is to stimulate domestic consumption but it will also provide new opportunities for domestic and foreign financial institutions to set up, or expand, their finance business in China.
Scope of business
Currently, individuals only have two ways to obtain a consumer loan - from commercial banks and automobile financing companies. Under the Draft Law, eligible consumer finance companies will be able to provide unsecured consumer loans to individuals either as a consumer durable loan or a general purpose loan. The former can be used to purchase such items as home appliances and electronic produces, but excluding real estate and automobiles. It is paid directly to durable distributors. The latter can be used for ordinary expenditure including travelling, wedding and home renovation and is paid directly to the borrower.
Loans can only be made up to an amount not exceeding five times the borrower's monthly income.
Eligibility of investor
The Draft Law allows both domestic and foreign investment, with investors being classified as either a "principal capital contributor" or an "ordinary capital contributor". Different requirements apply to each. A principal capital contributor is an investor who undertakes to contribute 50% or more of the registered capital of the consumer finance company to be set up. An ordinary capital contributor has less than 50% capital contribution.
The following major requirements apply to each:
| Principal capital contributor | Ordinary capital contributor |
| More than 5 years of experience in consumer financing | (For financial institution) Registered capital of not less than RMB 300 million (USD 43.9 million) |
| Total assets of at least RMB 80 billion (USD 11.7 billion) | (For non-financial institution) Net asset ratio of not less than 30% |
| Profitable for the past 2 fiscal years | |
| No material violation of law and regulators for the past 2 years | |
| Investment capital must not be borrowed | |
| Covenant not to transfer its shares in the consumer finance company within 3 years | |
| Have sound management, internal control and risk management system | |
| (For foreign investor only) Established representative office in China for more than 2 years | |
Operating benchmarks
A consumer finance company must have a minimum registered capital of RMB 300 million. Also, to minimise risk, the CBRC requires finance companies to meet the following ratios:
- capital adequacy ratio must be no less than 10%
- loans from interbank borrowing must not be more than 100% of its total capital, and
- loss reserve adequacy ratio of assets (actual reserves of credit risk assets/ the required reserves x 100%) must not be less than 100%.
Consumer finance companies will not be able to accept deposits from the public but they will be able to raise capital in the interbank loan market and also issue bonds.
Conclusion
The Draft Law is only one of the measures taken by the Chinese government to promote domestic consumption. Earlier this year, the government introduced sales tax cuts and a series of subsidies for purchasing durables and automobiles. Local governments in various provinces also distributed vouchers to encourage spending. While the enactment date and the actual impact of the Draft Law is yet to be seen, it is clear from the above steps that the Chinese government is eager to create a favourable environment to facilitate domestic consumption.
From a financial market point of view, the measures are yet another step taken by the Chinese authorities to open up the financial markets by supporting the development of "innovative" products and providing opportunities for new entrants. Over time, the development of a deep consumer finance market will also provide new classes of assets for China's emerging securitisation market.
For more information, please refer to the Draft Law (available in Chinese copy).
The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. Howeve,r we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law. The content of this article is intended to provide a general guide to the subject matter.
The publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.