Article by David Olsson, Xiuli Zhao and Tracy Chan
China's consumers will soon have access to additional sources of consumer finance for household items and general purposes. Following a one month public consultation process, China's banking regulator has issued final rules allowing domestic and foreign institutions to establish consumer finance companies in Beijing, Shanghai, Chengdu and Tianjin.
The new rules are contained in the Measures on Managing Trial Consumer Finance Companies (Law) and were recently posted on the website of the China Banking Regulatory Commission (CBRC). The Law was promulgated on, and has effect from, 22 July 2009.
Readers of our previous alert on the Draft Law will recall that the pilot program was launched in May 2009 in a move designed to encourage domestic consumer spending to counteract falling exports following the global financial crisis. The new rules provide more detail on how consumer finance companies can be established and operated. During the trial period, CBRC has indicated that only one consumer finance company will be established in each city.
This alert highlights the differences between the Law and the Draft Law and briefly analyses how the Law is likely to impact the Chinese market and prospective investors.
While the Law is substantially the same as the Draft Law, CBRC has taken account of public comments and fine-tuned the rules to make them more investor friendly. The key changes are:
Scope of business - broadened scope
The Law broadens the business scope of consumer finance companies by adding two categories of permissible business. The Draft Law provided that consumer finance companies were only allowed to provide loans for the purchase of specific durables or for general purposes. In a welcome development, the Law provides that those companies can now also act as a selling agent for insurance products relating to the consumer finance loans. Additionally the companies are specifically allowed to invest in fixed-income securities as a way of encouraging them to better utilise their capital (their minimum registered capital must be RMB 300 million (approx US$44 million)) and reduce operating expenses.
Eligibility of investor - reduction of the total asset requirement for a principal capital contributor
In a move designed to encourage greater institutional interest amongst small to medium sized bank and financial institutions, the Law reduces the minimum total asset requirement for a principal capital contributor from RMB 80 billion (approx US$11.7 billion) to RMB 60 billion (approx US$8.8 billion). A principal capital contributor is an investor who undertakes to contribute 50% or more of the registered capital of the consumer finance company.
Eligibility of investor - providing flexibility for the representative office requirement for a foreign investor
The Draft Law stated that an eligible foreign investor must have had a representative office in China for more than 2 years. The Law now provides greater flexibility by allowing a capital contributor to be eligible if it has a branch in China, which need not have been established for 2 years.
Operating benchmarks - ratio for investment balance
A new requirement has been included in the Law which provides that a consumer finance company must ensure that the balance of any investments it makes (other than by way of loans) does not exceed 20% of its total capital. The purpose of this requirement is to strike a balance between the interests of the company and consumers and to prevent consumer finance companies from allocating a disproportionate sum in non-loan investments.
Other miscellaneous changes - information disclosure obligation
The Law emphasises that a consumer finance company must develop an information disclosure mechanism modelled on the specifications under the Measures on Disclosure of Information by Commercial Banks promulgated by the CBRC. In particular, consumer finance companies are obliged to disclose the following information in a timely manner:
- financial accounts
- risk management situation
- corporate governance, and
- any material events.
Other miscellaneous changes - restrictions on those that are eligible for a general purpose loan
During the consultation period, concerns were raised that some consumers may seek to use the loan funds for stock speculation, rather than for the purchase of consumer durable items or general purposes. The Law now includes an additional requirement that only those customers who have previously borrowed a consumer durable loan from a consumer finance company and have a sound repayment record are eligible for a general purpose loan from that company.
As noted in our earlier alert, the Law is one of a number of measures being taken by the Chinese government to stimulate domestic consumption. It remains to be seen how many financial institutions that will seek to develop this aspect of their business, but reports in the local press indicate that several domestic and international institutions are actively looking this.
Apart from providing new finance avenues for consumers, the Law represents an opening up of the Chinese financial markets to both domestic and foreign investors and is further evidence of the Chinese authorities' willingness to create new, but appropriately regulated, products to the retail market.
For more information, please refer to the Law (available in Chinese copy) and our earlier alert.
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. However 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.