1. Overview of China's private consumption growth
China's consumer market has soared over the past nine years. Total retail sales of consumer goods have jumped 7.4% in terms of compound annual growth (see chart 1). Although private consumption slowed amid stringent mobility control measures in 2020-2022, China's post-pandemic reopening has helped retail sales recover. In the first quarter of 2023, total retail sales of consumer goods reported 5.8% year-on-year growth to Chinese renminbi (RMB) 11.5 trillion, compared with a 0.2% year-on-year decline in the fourth quarter of 2022.
S&P Global Ratings does not expect a V-shaped retail recovery in 2023. In our view, momentum will build over the year, with a stronger second half to lift retail sales 5.8% (ex-petroleum) for 2023 (see "China Retail Outlook 2023: More Bricks, Fewer Clicks", published Jan. 9, 2023).
Chart 1
The vast scale of China's private consumption has cemented its status as the second-largest consumer market (by country) in the world. Key underlying drivers for this rapid growth include increasing GDP per capita, rapid urbanization, growth in the middle class, and the proliferation of e-commerce.
Besides, the government has provided a policy push to drive consumption growth in the long-run, given the country's pivot toward a more consumption-based model. A strategic plan for expanding domestic demand (2022-2035) was unveiled in December 2022 by the central leadership, which highlighted boosting consumer spending as a key task in the coming 12 years. Following the release of the strategic plan, various supportive policies and stimulus measures have been rolled out at both the central and local-government level.
Compared with other developed countries, the consumer market in China still has substantial untapped potential. In 2022, China's final consumption expenditure accounted for over 50% of its GDP, which is still below the levels of other major economies such as the U.S., Japan and Germany, where the ratio ranges from 70%-80%, based on data from the World Bank and China's National Bureau of Statistics.
2. Key developments in China's consumer loan market
The consumer finance market has displayed robustness since 2013--widely recognized as Year One of China's internet finance era. With the rising penetration of internet finance and online payments, consumer loans have gained sizable momentum, mainly due to business originated through online channels. During 2013–2019, China's outstanding consumer loans recorded annual growth of 15%-62%. However, the onset of the pandemic in 2020 slowed growth. As of the end of 2022, consumer loans outstanding totaled around RMB17.25 trillion, up by 4.1% year on year. After reopening, consumption loan volumes rose 11% in the first quarter of 2023, compared with the same period of 2022 (see chart 2).
In terms of penetration rate, consumer finance is generally on an upward trend. We estimate the penetration rate at 39% in 2022, tripling over the past nine years. Wider usage of credit products, improving data transparency, and unified regulation of online and peer-to-peer (P2P) lending largely drove the increase, in addition to booming private consumption over the past decade.
Chart 2
2.1 Type of consumer loan originator
Commercial banks, consumer finance companies (CFCs), and microloan companies are the three major types of players in the consumer finance market in China. Banks dominate the sector through credit card instalment products. However, given that credit cards and consumer loans cater to different client segments, we will narrow the scope of discussion and focus on consumer loans in this commentary.
Commercial banks have various advantages, including low funding costs and wide branch networks, while most licensed CFCs benefit from efficient origination processes and relatively lower customer acquisition costs via online channels.
Microloan companies have recently entered the industry. Most licensed microloan companies were previously the consumer finance segments of e-commerce companies or peer-to-peer (P2P) lending companies. Such companies have an advantage in customer acquisition, especially through online channels.
2.2. Recent developments in the consumer finance market from the perspective of asset backed securities (ABS)
Tightened regulation. Chinese authorities have published a series of guidance documents and policies for market participants after a few years of rapid growth in the online consumer finance sector. In 2017, working groups of the People's Bank of China (PBOC) and the former China Banking Regulatory Commission (CBRC) issued a notice on regulation and rectification of small personal unsecured loans, or so called "Cash Loan" businesses. The notice specified restrictions on loan purpose, interest rate, customer assessment, and operation of online lending businesses. (i)
Following this notice, more detailed guidance has been released on the consumer loan products and business operations of various types of consumer finance entities. The key theme is to strengthen customer protection, refine risk management framework, and improve the effectiveness of governance.
A noteworthy trend is the enhanced supervision on licensed CFCs. Since 2021, all CFCs are classified into five regulatory categories--very similar to the tiered regulatory approach adopted on commercial banks. In the criteria for categorization of CFCs, higher weights are put on risk management, corporate governance and internal control, and service quality, indicating key points of focus for regulators.
Regulators have also issued rules to boost oversight of the online microlending sector. Detailed regulations cover companies' scope of business, leverage ratio, and funding sources. For instance, regulatory oversight over licensed CFC's corporate governance has been strengthened since the revision of "Measures for the Regulatory Assessment of Corporate Governance of Banking and Insurance Institutions" by the National Administration of Financial Regulation (NAFR, previously known as the China Banking and Insurance Regulatory Commission), in November 2022.
Increasing number of licensed CFCs amid evolving regulatory environment. We have seen a trend of microloan platforms applying for CFC licenses or trying to get involved in CFCs via equity investments, amid tightening regulatory oversight over consumer financing and online lending. In May 2023, a new CFC has obtained regulatory approval to launch, such that there are 31 CFCs licensed by NAFR as of May 31, 2023.
For newly established CFCs, we see diversified shareholder structures. Retail stores, e-commerce giants, and commercial banks are common in their shareholder mix. This can help lower funding costs and customer acquisition costs.
Hybrid origination model and digitalization. Hybrid origination model and digitization play a crucial role in boosting consumer lending activities, from the perspectives of both customer acquisition and business operation.
In terms of client acquisition, consumer loan providers often build "online + offline" business models. While offline origination channels are crucial to assess credit and fraud risk, especially for large-scale financing, lenders' cooperation with e-commerce players or deployment of online distribution channels can significantly expand their existing user base. The "one-stop" online service platforms provided by CFCs and microloan platforms are also more convenient and efficient to capture customers' needs for small-scale financing than offline customer interaction would. Besides, detailed analysis of customer behavior through big data analytics can further increase finance penetration rates.
On the operational side, digitalizing core processes can increase operational efficiency and business performance. Some leading CFCs employ comprehensive information systems to support online loan origination, underwriting, risk management, loan servicing, and arrear management. Similar to auto-finance companies, most CFCs that are active in the ABS market have also developed a quantitative credit-scoring system for credit assessment, enabling automatic case approval or rejection, or referring the case for manual approval.
2.3. Typical consumer finance products
Consumer loans offered by commercial banks. Unsecured consumer loans offered by commercial banks are a mature financing product. According to publicly available information, for borrowers with income proof and reviewed credit records, the loan size can go up to RMB800,000 and maximum loan tenor can reach five years. Revolving credit line is available mainly for existing clients. Consumer loans can be repaid via various methods, including equal principal (equal P), equal instalment (equal P+I), bullet, and balloon payments.
The interest rate on bank-originated consumer loans is usually fixed by adding a margin on the one-year loan prime rate (LPR). The margin could be as low as 0.1%-0.3% or even negative, depending on the borrower's credit profile. In general, commercial banks charge 3%-8% on unsecured consumer loans. Against the backdrop of sliding interest rates in China, interest rates that banks offer to their best customers have been dropping over the past 12 months.
Regulators have tightened requirements on online lending by commercial banks. Therefore, for online consumer loans, the size is capped at RMB200,000; and for loans with a bullet structure, loan tenor is capped at one year.
Consumer loans originated by licensed CFCs. For consumer finance products originated by licensed CFCs, key product parameters are not as flexible as those offered by banks. Loan size, per NAFR requirement, is capped at RMB200,000; while common loan tenor is up to three years. Revolving credit lines of up to three years are also available for selective applicants such as white-collar workers. Average loan size varies depending on origination channels--loan size of online originated transactions ranges from RMB500-RMB50,000, while the average size of deals originated offline may exceed RMB180,000 for some CFC originators. (ii)
Interest rates on consumer loans are all fixed and normally higher than bank products, capped at a maximum of 24%. Some 0% interest rate loans are also occasionally launched by certain CFCs as promotional products, with interest being subsidized by merchandisers or retailers. In general, CFCs charge a relatively higher interest rate of 14%-24% on unsecured consumer loan products. (ii)
Under NAFR regulations, proceeds of consumer loans are prohibited from use in investment, business-related, gambling, or home purchases.
3. Consumer loan securitization in China
Consumer loans can be securitized through three schemes: credit ABS under the credit asset securitization scheme, corporate ABS under the Asset-Backed Specific Plan, and asset-backed notes (ABN) scheme managed by China's National Association of Financial Market Institutional Investors (NAFMII). Given the availability of data, we will focus on the issuance and performance of credit ABS in this section.
3.1. Issuance trend
Issuance of consumer loan ABS has been relatively volatile over the past nine years. In the pre-pandemic era, annual securitization volumes under the credit ABS scheme surged to RMB31.4 billion in 2018, with the support of strong consumption growth and China's internet finance boom. However, tightened regulation and weakened consumer sentiment under prolonged COVID-19 restrictions curbed growth in 2020, when issuance volume dropped to RMB18.4 billion. Nonetheless, issuance has gradually recovered in the past two years, in part due to the various stimulus measures introduced by the government to boost consumption.
We forecast significant growth in the issuance of consumer loan ABS over the next few years, though volumes may be volatile in the next few quarters. Our projection considers policy support, enhanced and centralized credit data infrastructure, increased funding needs, and investors seeking higher returns.
Chart 3
3.2. Key issuers
In the past few years, some licensed CFCs and regional banks have tapped the ABS market for funding. Since 2019, more CFCs have made their debuts in ABS market. As of May 2023, 13 out of the 31 licensed CFCs have issued ABS under the supervision of NAFR. Recent frequent CFC issuers include Mashang Consumer Finance Co., Ltd., Industrial Consumer Finance Co., Ltd., Henan Zhongyuan Consumer Finance Co., Ltd. and Hubei Consumer Finance Co., Ltd.
Based on the respective majority shareholder, we can further classify CFCs into bank-sponsored CFCs and non-bank-sponsored CFCs. These two groups may show some differences in asset characteristics, risk management framework, and asset performance.
Chart 4
3.3. Asset characteristics
Diversified pool with no loans in arrears. China's consumer loan ABS issuances to date are backed by well-diversified pools. The number of loans in a pool ranges from thousands to over a million. Top 20 borrowers normally account for less than 0.5% of the total pool balance, limiting concentration risk. In addition, asset eligibility criteria only allow "normal" loans without arrears at the time of securitization to be included.
Geographical concentration differs among different types of originators. CFCs usually have more diversified assets compared with loans originated by regional banks. This could be attributable to the nationwide branch networks of CFCs, especially for top-tier players. Regional banks, in contrast, tend to operate at the provincial level and serve local customers.
Interest rate type. Most consumer loan receivables securitized in China are fixed-rate loans. However, some regional banks have securitized floating-rate loans at deal closing, and floating-rate loans can be added to the pool during the revolving period. Because the base rate of floating-rate loans is usually referenced to the one-year LPR, transactions backed by floating-rate loans may be subject to interest rate risk if those transactions pay fixed-rate coupons.
Principal repayment method. Unlike auto loans and residential mortgage loans, balloon and bullet repayments are common in consumer loans. For issuances during January 2020-May 2023, deals backed by regional banks and bank-sponsored CFCs often contained a high percentage of bullet contracts, while non-bank sponsored CFCs frequently pooled loans with equal monthly instalments or equal principal repayments into securitized pools. For most of the transactions backed by bullet assets, the weighted-average remaining tenor of securitized assets falls within nine months.
S&P Global Ratings assesses commingling risk exposure with the servicer, based on the amortization schedule and remittance frequency of asset collections to the issuer. We will address potential loss or delay in cashflow analysis to address the commingling risk if there is no sufficient structural mechanism in the transaction to protect the issuer from any loss or delay in receiving funds in the event of the servicer's insolvency.
Varying seasoning with the majority having contract tenors of one to three years. Loan tenors of one to three years are common. For bank originators, the average loan tenor normally ranges from one to 2.5 years, while CFC originators are offering loans of one to three years. The seasoning of securitized pools ranges from less than one month to 10 months in most transactions.
The table below summarizes key characteristics of the three major types of consumer finance providers.
Summary of Asset Characteristics for Transactions Originated During January 2020-May 2023
Table 1
| Selective pool characteristics | Regional banks | Bank-sponsored CFC | Non-bank sponsored CFC |
|---|---|---|---|
| Number of borrowers | 6,200–25,000 | 4,000-350,000 | 7,000–1,700,000 |
| Geographical concentration | Relatively concentrated | Diversified, but depends on business scale | Diversified, but depends on business scale |
| Average loan size per borrower (RMB) | Large; 120,000-200,000 | Medium; normally ranges from 45,000-170,000 | Small, normally below 10,000, but offline originated loans may be larger |
| Maximum loan size (RMB) | 500,000 | 200,000 | 200,000 |
| Interest rate type | Fixed and floating | Fixed | Fixed |
| Asset yield | Relatively low, below 10% | Varying, 11%-24% | Relatively high, normally 20%-24% |
| Loan tenor (years) | 1-2.5 | 1-3 | 1-3, depending on origination channel |
| Principal repayment method | Equal P+I, Bullet | Equal P+I, Bullet | Equal P+I or Equal P |
3.4. Deal structure
Multi-tiered capital structure. Most of China's consumer loan ABS transactions have two to three senior tranches with descending seniority, namely class A, class B, and class C, followed by a subordinated tranche. Class A usually accounts for 70%-80% of the total issuance amount while the thickness of the subordinated tranche varies by originator–-generally 7%-9% for deals originated by banks and 10%-30% for issuances by CFCs.
Separate interest and principal waterfall. Consumer loan ABS transactions often adopt separate interest and principal waterfalls. Principal draw can be used to pay shortfalls of senior notes' interest payment, when needed. This helps mitigate liquidity risk, especially if no liquidity reserve is in place. Remaining principal collections will be used to pay down notes in a pass-through manner.
Sequential pay structure dominates. In a typical issuance structure, senior notes will receive interest payments on a regular and sequential basis. The note principal will also be amortized in order of seniority. Subordinated notes won't receive principal payment until senior notes are redeemed in full.
Credit enhancement. Primary credit enhancement used in Chinese consumer loan ABS transactions is provided in the form of notes subordination and excess spread. Overcollateralization is rarely found in recent deals.
Revolving structure. We have seen increasing adoption of revolving structures in recent years, especially in repeated issuances from frequent originators, including Industrial Consumer Finance Co., Ltd., and Mashang Consumer Finance Co., Ltd. Receivables are purchased and added to the securitized pool during the reinvestment period, typically one month to 12 months. The transaction will stop reinvestment and start amortization upon the occurrence of an early amortization event trigger, which typically includes a performance-based trigger such as the cumulative default rate exceeding a certain threshold, as well as the occurrence of other acceleration events or events of default.
Funding efficiency and investors' needs may partly drive the prevalence of revolving structures. We expect more consumer loan ABS to be rolled out with revolving structures in the future as more regional banks and CFCs enter the ABS market.
3.5. Asset performance
Based on the dynamic pool performances of active originators from their publicly available registration reports, we have derived 61-90 day-past-due (DPD) ratio (M3) for each originator and weighted average M3 ratios for banks and CFC originators (see charts 5 and 6).
The historical asset performance of regional banks seems less volatile than that of CFC originators. The weighted-average M3 ratio of regional banks that have disclosed registration reports usually remains below 0.06%, while that of recent active CFC originators has been fluctuating from 0.1% to around 1%. (iii)
We also observed higher M3 ratios for the second quarters of 2020 and 2022 (where data is available) than some previous periods. Disruptions to repayment and arrears collection due to COVID-19 likely accounted for the increased delinquencies in these two quarters.
Some originators exhibited idiosyncratic trends during some periods in terms of their M3 ratios. For example, the M3 ratio surged in some quarters in some datasets, or has been on the rise in recent quarters, albeit from a low level. From a rating perspective, it is important to understand the drivers behind such a trend, and whether it is likely to continue.
Besides registration reports, we also observed selected consumer loan ABS issued under the credit asset securitization scheme. The collateral performance of selected consumer loan ABS continued to deteriorate in the first quarter of 2023. This could be a result of lingering effects after China relaxed its pandemic-control measures.
For some consumer loan ABS issued by top-tier consumer finance companies and banks under the credit ABS scheme, the M3 ratios increased by 45 basis points (bps)-111bps during the first quarter of 2023, compared with a flat movement in auto loan ABS during the same period (see "China Securitization Performance Watch 1Q 2023: A Slow Quarter For Issuance," published May 17, 2023).
We do not rate these transactions and cannot ascertain the performance trend and the structural mitigants, such as how much excess spread could be used to absorbed potential credit losses. However, the performance we observed during the period is a good indication of the level of volatility in this asset sector.
Chart 5
Chart 6
End Notes
(i) CBRC merged with China Insurance Regulatory Commission and was renamed the China Banking and Insurance Regulatory Commission (CBIRC) in 2018. CBIRC was further restructured into the current National Administration of Financial Regulation in May 2023.
(ii) The findings of the average loan size per borrower and interest rate range are based on registration reports and offering circulars released during January 2020–May 2023 by active consumer loan ABS issuers.
(iii) The range is observed based on the condition that at least two originators' delinquency data are available for calculating the weighted average M3 ratio. Data extracted from registration reports or offering circulars released during January 2020 - May 2023 by active consumer loan ABS issuers.
Related Research
- China Securitization: Auto ABS And RMBS Tracker April 2023, May 29, 2023
- China Securitization Performance Watch 1Q 2023: A Slow Quarter For Issuance, May 17, 2023
- Credit Conditions Asia-Pacific Q2 2023: Still Steady, Banking Turmoil Risk Is Moderate Here, March 28, 2023
- Economic Outlook Asia-Pacific Q2 2023: China Rebound Supports Growth, March 27, 2023
- Economic Research: The Case For Cautious Optimism On China's Rebalancing And Openness, March 13, 2023
- China Consumer Products And Retail: Sales Pick Up As COVID Controls Wind Down, Jan. 13, 2023
- China Structured Finance Outlook 2023: Issuance Likely To Slowly Stir, Jan. 12, 2023
- China Retail Outlook 2023: More Bricks, Fewer Clicks, Jan. 9, 2023
This report does not constitute a rating action.
| Primary Credit Analysts: | Yilin Lou, Hong Kong +852 2533 3524; yilin.lou@spglobal.com |
| Melanie Tsui, Hong Kong +852 2532 8087; melanie.tsui@spglobal.com | |
| Secondary Contact: | Jerry Fang, Hong Kong + 852 2533 3518; jerry.fang@spglobal.com |
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