China’s consumer lending market: The land of plenty

China’s latest GDP numbers, showing the slowest quarterly growth in seven years, have attracted the attention of international investors. However, according to a recent BCG study, while economic growth has slowed, consumption is still growing at an astounding rate. China’s consumer market is projected to expand by about half, to $6.5 trillion, by 2020 — even if the annual real GDP growth fails to reach the official targets.

There are three driving forces behind this transformation. The first is the rise of the middle class – a new generation of sophisticated shoppers who are optimistic about their future income and are not afraid to spend. This optimism has helped China to secure second place in Credit Suisse’s Emerging Consumer Scorecard – a survey of consumer confidence levels across the largest emerging markets. Based on OECD forecasts, by 2030, Asia will represent two thirds of the global middle-class population and 59% of middle-class consumption, with China in the lead.

The second driving force, technology, is also transforming China’s consumer market. According to Credit Suisse, Internet and smartphone access penetration in the country has reached the 80%-90% bracket, highlighting fascinating prospects for the future of online and mobile banking.

The third significant factor is the wider government reforms focused on transitioning the Chinese economy from investment based to one driven by domestic consumption. China’s government has long realised the benefits of promoting consumer lending: additional liquidity, higher spending power, new jobs and stimulated demand. Home Credit was at the forefront of the government initiative to introduce consumer lending in the country: six years ago, we became the first foreign-owned financier to obtain a lending license. A pilot consumer finance scheme in just four major cities launched in 2010 was successfully rolled out nationwide with Home Credit now active in 280 cities across China. In March, China’s Central Bank promised to further support the nascent consumer lending industry and called on consumer financiers to innovate and expand their product offering.

Chinese regulators are also attempting to streamline the credit rating and approval process, thus creating an efficient and competitive market. In a recent example, it encouraged the country’s eight largest e-commerce companies to apply for credit reporting licenses. These efforts appear to be bearing fruit, as China’s consumer finance market is projected to reach $4.6 trillion already next year.

Since its entry in China, Home Credit has grown to become the largest consumer credit provider in the country with 9.8 million active customers, over 55,000 employees and registered capital of 3.3bln yuan ($507.8mln). Following president Xi Jinping’s visit to Prague in March this year, we announced a major investment programme in China with plans to spend $921mln and double the size of our business by the end of 2017. We plan to expand our loan product range, continue R&D in the area of new banking technologies and build a robust online lending platform – all while maintaining a physical sales network.

While growth figures for the Chinese consumer finance market look promising, it won’t necessarily always be a smooth journey. Volatility and uneven income distribution are issues consumer lenders in China should keep in mind. But building on sharper customer insights, constant innovation and a foundation of best practices, forward-thinking consumer lenders will be well positioned to benefit.