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
The following major requirements apply to each:
Principal capital contributor
Ordinary capital contributor
More than 5 years of experience in
(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
(For foreign investor only) Established
representative office in China for more than 2 years
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
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.
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
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The RBI, on March 31, 2016, has notified the Foreign Exchange Management (Establishment of a Branch office or a liaison office or a Project office or any other place of business) Regulations, 2016 in India...
The committee set up to draft a Code on Resolution of Financial Firms, by the Ministry of Finance, Government of India, on September 28, 2016, released a draft bill – The Financial Resolution and Deposit Insurance Bill, 2016...
The distressed assets situation in India has gradually worsened over the past few years. The stressed loans issue in banks has resulted from a combination of factors including :-
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).