Consumer Finance in the Context of Financial Inclusion

Consumer Finance in the Context of Financial Inclusion

By Dr. Bei duoguang

The original Chinese language version was first published on FT Chinese (

Dr. Bei duoguang: The focus of consumer finance should be steered to non-mortgage, scene-based consumer needs and even the cash loans that are not scene-based should not be subject to indiscriminate elimination.

Financial inclusion in its orthodox sense is to meet micro, small, and medium-sized businesses’ financing needs. As it grows, however, in addition to providing supports to businesses, financial inclusion also expands to include the provision of financial supports to households, especially those of low and middle income. In other words, supports to consumer finance is also a priority of financial inclusion.

To discuss supporting consumer finance in today’s atmosphere may be somehow sensitive as general tend to associate consumer finance with such negative concepts such as “overconsumption” or “expeditated consumption”. Nevertheless, in this article, I would like to elucidate the merits of consumer finance, household debt, major varieties of consumer finance, and how cash loan should be appraised, and draw conclusion on the issue.  


The Merits of Consumer Finance

China’s GDP growth is slowing down this year. Among the troika hauling the county’s economic growth, export, which used to be a more radiant one, is losing its glamour amid today’s economic situation. Between the remaining two, investment and consumption, apparently China still needs to invest and has considerable space to invest in, it can be argued, however, that consumption’s contribution will be increasingly pronounced, so will be its prominence in macroeconomy. 

“Consumption upgrading” is one of the buzzwords in today’s China but rather anticlimactic, some people have the opposite perception, arguing that the Chinese society is in reality experiencing a “consumption degrading”. A close scrutiny on the country’s income distribution will find that middle- and high-income segments who are indeed upgrading their consumption only make up a fraction of the entire population. The number of so-called high-income group, consisting of people with annual income of RMB130000 or higher, is merely 50 million across the country, while number of the middle-income group, defined as those with annual income between RMB65000 and RMB130000, is no more than 250 million. Combined, there are approximately 300 million people in total that can be categorized as middle- and high-income.


It is the members of this group that are notorious for their conspicuous shopping sprees abroad, giving the people across the world a delusion that Chinese in general are super rich. But it is merely a function of population scale – after all, the whole population of the United States is “merely” 300 million. Besides those 300 million conspicuous shoppers who inspire awes the world over, however, are 1 billion people of low income in China, the absolute majority of the country’s populace. Apparently, to stimulate consumption, the mass market serving these I billion should be further explored, and that is the key to a genuine “consumption upgrading” in China.

Moreover, when studying China’s income distribution, I believe that median is worthier indicator than mean, because mean could be rather misleading, whereas median, on the contrary, is more enlightening and better at telling the truth.

In the recent two years, China has witnessed a dramatic decrease in median per capita disposable income. What does it tell us? It tells us that the income growth of the majority of the population is losing momentum. In the second half of 2018, the growth rate of national median per capita disposable income decreased to 7% from the first half of the previous year’s 8%, and the median was less than 90% of the mean, indicating that the economic inequality between the high-income and low-income groups is worsening and Gini coefficient increasing.     

All in all, the income distribution of the entire population and the disposable income of the majority of the population are two basic facts that we have to keep a keen eye on when considering the future consumption demand. As the world’s most populated country, China offers a multitude of consumption levels, and instead of mistaking the 300 million middle- and high-income individual’s consumption upgrading as universal, we should pay more attention to the silent majority. After all, even in today’s China, over 400 million people still do not have access to hygienic latrines.


Household Debt

How do developed economies upgrade their denizens’ purchasing power? In addition to public finance’s contributions, in the realm of finance, three means are widely tapped into. The first is the philanthropic giving from the rich, which assist the poor via various charitable organizations. The second is the so-called popular capitalism, in which general public are encouraged to invest in equities and own properties to generate nonwage income, also known as asset income. An example is the United States’ 401(k) plan for employees (a pension scheme fully funded by contributions from both employer and employees), which allows the participants to invest part of their income in the capital market. The last, and, in my opinion, the most important, is to promote consumer finance, so as to enable people to meet their consumption needs via financial means, no matter what income brackets they belong.  

It is common knowledge that the increase of per capita income takes time, whereas consumer finance, to a certain degree, can improve low- and middle-income people’s purchasing power faster than otherwise.

People are wary of proposals of stimulating consumption via financial measures, because they believe that the household indebtedness is already too high. But I beg to differ. When analyzing household debt, I believe that it is necessary to draw a distinction between borrowing for investing and borrowing for consumption.

The current mainstream classification method treats all household debt as loans for consumption, which are subdivided into only two categories, namely long-term loans for consumption and short-term loans for consumption. In my view, such classification bears no economic merit nor statistic merit, because borrowing to purchase properties is not a consumption activity but investment activity. The National Bureau of Statistics treats purchase of housing as an investment activity. Then, why is it entered as loans for consumption, long-term consumption notwithstanding, in debt accounting? We all know that properties are a store of value and at least in China, generate capital gains, and therefore, purchasing properties is investing.  

The rapid increase of household indebtedness in recent years is mainly due to the increase of mortgage, which as argue above, are investing by nature, and loans for consumption still has ample room for growth. According to a study by UBS, by the end of 2022, the amount of loans for consumption, mortgages excluded, is expected to reach RMB18.5 trillion, with CAGR at 11%, a highly remarkable growth, and the increase is expected to reach RMB7.6 trillion.


Major Types of Consumer Finance

Major types of consumer finance include auto loans, student loans, and other loans. Mortgages, in the strict sense, are not loans for consumption. The “other loans” mentioned above include installment loans for consumption and cash loans that are not based on specific scenes. There is not much discord on most of the loans for consumption. On cash loans, however, people’s opinions do diverge.


How Cash Loans Should Be Appraised

There is much controversy in China on cash loans. In 2017, regulators introduced rather draconic policies concerning cash because of a series of negative cases such products instigated in the society. When dust settles, however, it is necessary for us to re-consider and re-appraise cash loans.

U.S.’s Federal Reserve has been conducting the Survey on Household Economics and Decision Making (SHED) to study how American households, especially low- and middle-income ones, cope with variations in household income and expenses. Included in the survey questionnaire are questions such as “If faced with an unexpected expense of USD400, would you be able to cover it?” and “Would you be able to cover three-month’s living expenses?”. The survey finds that the lower the household income, the less able are the individuals to cope with unexpected shocks, and quite a few of them have to resort to borrowing in emergencies. In addition, what are the common traits among low-income population? Low income for sure. But the survey finds that in reality, their greater vulnerability lies not in low income but in income volatility. Their expenses, such as tuitions for their children, or household bills, are usually not elastic, and therefore, for low- and middle-income, particularly low-income population, the most challenging predicament is short-term non-synchronization of income and spending. Their needs for emergency borrowing constitute the fertile ground for cash loans.

Prof. Jonathan Morduch of New York University finds that most of the low-income households struggle to manage their income and spending and balance their budgets on an annual basis but there are always gaps between what they earn and what they spend. A reason lies in that when their income increases, so does their spending, but when their income decreases, it is usually difficult for them to cut spending proportionally. This is human nature, as the old Chinese saying goes, it is easier for the frugal to turn extravagant than the extravagant to turn frugal, and this is where cash loans’ raison d’etre resides.  

In summary, I believe that we need to take a strategic perspective and recognize that consumer finance is instrumental in balancing China’s macroeconomy and ease the tension between the haves and have-nots. The development imperatives of consumer finance lie no doubt in meeting the non-mortgage, scene-based consumption needs. Even for those cash loans not based on specific scenes, indiscriminate elimination is not warranted. Instead, regulations of appropriate degree and effective consumer protection mechanisms are what we need.