Household Credit in China:
Lessons from Abroad
Bruce L. Reynolds
Department of Economics
University of Virginia
February 19, 2005
Prepared in fulfillment of a research grant from the Filene Research
Institute, University of Wisconsin
Abstract: This paper summarizes the results of a research conference convened at
Beijing University, China, in August 2004, with the financial support of the Filene
Research Institute and CUNA-Mutual Inc. The conference asked: How does the
consumer lending sector work in the U.S.? What are the key institutional strengths or
weaknesses of the U.S. system? What has the Chinese experience with consumer credit
been to date? What guidance might Chinese policy makers, academics and consumer
lending practitioners gain from the U.S. experience with this sector?
Preliminary: Please do not cite or disseminate the contents of this report without
written permission from the author. I owe thanks to Wake Epps and others at the
University of Virginia for helpful criticisms, and to Jamie Xu for quick and accurate
Institutions that foster the intermediation of savings to investors are arguably the
most critical part of the infrastructure of any modern economy. They make possible the
constant increase in the capital-intensity of the production process. More and more, the
capital in question is human capital rather than physical capital. (One recent estimate
asserts that human capital accounts for 95% of the U. S. capital stock.)1 Any sort of
capital creation involves investment. Investment cannot proceed without saving. And so
the market for loanable funds is arguably the most important market in the economy.
It’s also the one most prone to market failure. Financial transactions necessarily
extend across time and space, involve mathematical computations that can be daunting,
and are prey to many other sorts of uncertainty as well – in particular, concerning the true
cost of borrowing, or the ability and willingness of the borrower to repay. Faced with
such uncertainty, rational agents wishing to borrow or to save may well draw back, and
the market for loanable funds may “fail” – that is, fall short of its full promise for raising
human welfare. Virtually every institutional aspect of financial markets – futures
markets, mortgages, securitization mechanisms, etc. – has grown up to avert this failure.
If we consider the three main types of borrowers – governments, businesses and
households – it’s immediately apparent that the potential for market failure is greatest in
the case of household credit. These transactions are on a far smaller scale than others.
Consequently, households can more easily engage in opportunistic default, knowing that
the expected return to the lender of pursuing the defaulter is unlikely to outweigh the
fixed cost of doing so. The fixed costs of each loan evaluation are also harder to spread
out when the loan amount is small. Households are more unsophisticated than businesses
or governments, and thus may themselves be wary of opportunistic behavior on the other
side of the transaction. The largest single household expenditure – on a child’s education
– cannot easily be securitized. Thus, the household credit sector is replete with the
potential for market failure. We should consequently not be surprised to find there a lush
ecosystem of institutional adaptations designed to overcome these problems, such as
consumer credit protection laws, small, non-profit credit unions, and secondary markets
(pioneered by FNMA) that enable mortgages and educational loans to be securitized.
Gary Becker, “Human Capital in the U.S. Economy”, in Mulligan (1997).
The growth of the consumer credit sector in the U.S. – the steady rise in household
credit’s share of total lending described below – reflects the impact of these institutions,
as well as of technological innovations in the provision of financial services.2
In 1998, a scant two decades after rediscovering the market mechanism, China
opened up the household credit sector. Lending to households is now growing very
rapidly, far faster than lending to business or to government. The rapid rise in Chinese
urban incomes, and China’s openness to new institutions and technologies, presage a
major future role for household credit. Will China move down the same path the U.S.
has followed in consumer credit, developing an analogous repertoire of institutions? It’s
a truism of the modernization process that technology – for example, the infotech that
today enables a credit card the globe on the Internet, buying at will – is far more
transferable than the accompanying institutional arrangements.
In August 2004, some four dozen academics, policymakers and practitioners came
together at Beijing University’s China Center for Economic Research, to review thirteen
formal papers seeking answers to these questions. This paper summarizes the conference
findings. Part 1 reviews the growth and institutional change in the United States credit
sector over the past half century. Part 2 summarizes the growth of China’s household
credit sector since 1997. Part 3 identifies suggestions for Chinese policymakers and
practitioners. In Part 4, a brief conclusion reflects on the complex interaction, in the
formation of financial institutions, between government regulators and the private sector.
2. Household Credit in the United States: Growth and
This section tries to look several decades into China’s future, asking: What has
been the experience of the United States with consumer credit since World War II? Do
we see patterns that might have predictive power for China as consumer credit expands
This report uses consumer credit and household credit interchangeably. Conference participants noted more than once
that “consumer credit” suggests credit for the purchase of consumption goods. Since household borrowing is typically
for investment activity, many participants preferred to use the term “household credit”.
Broadly speaking, over the last fifty years the U.S. experienced steady capital
deepening. Business, farming, government and households all made increasing use of
credit markets. The share of credit flowing to households steadily rose. Today,
households are the primary borrowers in U.S. credit markets, borrowing more than either
government or business. Figures 2.1-2.6 tell this story in more detail.
Fig. 2.1: Credit vs. GDP, 1945-2003
billions of current dollars
GDP: U.S. Department of Commerce – Bureau of Economic Analysis ( www.bea.gov/ )
Credit: FRB Statistical Release ( www.federalreserve.gov/releases/z1/20040610/data.htm )
Fig. 2.1 shows the rapid rise of total credit outstanding, relative to the slower
growth in GDP, over this half century. This long-term upward trend reflects the
increasing capital-intensity of the technology through which all sectors of the economy –
government, businesses and households – produce goods and services. The underlying
stock of government infrastructure, of business capital stock, and of households’
productive capital (especially human capital) is many times larger than the stock of credit
shown here, since a portion is financed through borrowing. But one conjectures that the
financed share is at least a constant or more likely a rising portion of the whole.
China in the next fifty years can anticipate that this sort of financial deepening
will proceed more rapidly than in the U.S. case. As a latecomer to industrialization,
China’s GDP growth rate will be significantly higher for at least several decades than the
U.S. growth rate in the last fifty years. Furthermore, the financial services technologies
and institutions that slowly emerged in the U.S., and that made financial deepening
possible, are already available for appropriate adoption and adaptation in China. China’s
financial system today is arguably somewhere between the U.S. in 1955 and the U.S. in
1985. The data underlying Fig. 2.1 show that total credit in the United States grew at a
6% annual rate in the twenty years beginning 1955, and at 4.5% in the twenty years
beginning 1985. This U.S. growth experience is a minimum estimate of the growth rate
of China’s overall credit sector. Factoring in China’s higher GDP growth rate, I predict a
growth rate for credit of between 9 and 13% per year.
Within this stream of borrowing, the role of consumer credit – borrowing by
households – is increasingly important, as Fig. 2.2 shows. In the early 1950s,
government accounted for more than half of all borrowing, followed by business and
household borrowing. Farms, a minor part of the economy even then, essentially
disappear from the picture by the end of the century.
Over time, the role of government in credit markets diminished dramatically.
Even in the Reagan era of heavy government borrowing, the business and household
sectors held their own. By the end of the century, households had emerged as the
dominant borrowers in the marketplace, accounting for more than 40% of all credit
Fig. 2.2: Sectoral Distribution of Credit, 1945-2003
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: Federal Reserve Statistical Release: www.federalreserve.gov/
Flow of Funds Accounts of the United States - Annual Flows and Outstandings:
Table L.1 Credit Market Debt Outstanding (1)
What accounts for this trend? Did household demand for credit rise quickly over
time, more quickly than demand in other sectors? Or did credit markets over time
become increasingly willing and able to lend to households? The second reason – a shift
in the credit supply to households - seems the more likely. We know that during this
period, the ability of lenders to obtain information on the prior borrowing and repayment
behavior of households increased dramatically, as did their ability to track households
and enforce repayment of debt. Households, in turn, became increasingly aware that
prompt, regular repayment of debt would ensure a strong credit rating, and hence lower
Another important change was the development of secondary markets in
securitized debt. In the early decades of the century, because the same bank that
originated a home mortgage carried that mortgage to term, banks required households to
refinance the mortgage every ten years. In the 1930s, due to widespread bank failure,
millions of Americans lost their homes. The Roosevelt Administration responded to this
problem by creating a secondary market, through the Federal National Mortgage
Association (FNMA), within which banks could sell mortgages; the mortgages could then
be bundled into assets with much lower risk, and sold as bonds. Today, the same
approach – the creation of pools of securitized assets – has also dramatically increased
lending for automobile and educational and credit card debt. This pooling and bundling
approach helped to overcome a fundamental obstacle to household borrowing: the fact
that millions of small households are intrinsically more risky (and hence less appealing)
borrowers than thousands of large businesses, or hundreds of municipal, state and federal
governments. As Part 4 notes, in China these secondary markets are still absent.
More generally, this half century tells a dramatic story of the shift between the
state sector and the private sector. The state began the period borrowing more than half
the available credit. By the end of the century, private sector borrowing was more than
three quarters of the total, perhaps because private households and businesses were
increasingly credit-worthy. China will experience a similar sort of evolution over the
next fifty years or less.
Fig. 2.2 shows that in the United States, farms in 1955 already accounted for a
negligible share of total borrowing, and by 2004 their share was essentially zero. We do
not expect that this is any sort of prediction for China’s near-term future. On the
contrary, the three conference participants who addressed credit provision to rural and
farm households in China uniformly reported that these borrowers are woefully
underserved in China, particularly since the withdrawal of the Agricultural Bank of China
from rural areas.3 Indeed, the Chinese consumer credit sector described in the next
section is essentially urban consumer credit. In a China where more than 20% of GDP is
still agricultural, and more than 50% of households live in rural areas, it would be
growth-enhancing to devote a larger share of formal lending to rural households, and this
would also mitigate the startling rise in rural-urban income inequality since 1990.
Figure 2.3 shows consumer credit as a percentage of disposable income. This
statistic is sometimes used to assert that households are “sinking deeply into debt” – that
they are borrowing too much. And indeed, Figure 2.3 shows U.S. households borrowing
more and more over time, relative to their incomes. This trend persists despite the fact
that the figure excludes home mortgages; including mortgages would accentuate the
trend. Does this indicate that U.S. households in 2003 faced a debt crisis?
See papers by Minggao Shen, Enjiang Cheng, and Mingquan Liu et al.
Fig. 2.3: Consumer Credit Outstanding as a % of Disposable Personal Income,
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Disposable Personal Income: U.S. Department of Commerce - Bureau of Economic Analysis (
http://www.bea.gov/ ) National Income and Product Accounts Table, Table 2.1 Personal Income and Its
Disposition; [Billions of dollars] Seasonally adjusted at annual rates
Consumer Credit Outstanding: Federal Reserve Statistical Release ( http://www.federalreserve.gov/ )
It seems implausible that a trend which persists for more than a half century is a
sign of impending crisis. To gauge that question, the more useful statistics are default
rates, measures of household net worth, and household attitude surveys. Rather, the
rising trend in Fig. 15 simply tells us that as incomes rose, as new technologies emerged
and as credit markets were increasingly open to household borrowers, a rising proportion
of U.S. consumption came to be produced by households, in the form of a flow of
productive services from their growing stock of housing, automobiles, TVs, VCRs,
appliances and human capital. Increasingly this household capital is financed by
What growth rate might the Chinese consumer credit sector experience over the
next two decades? Based on the above reasoning, and extrapolating from the data in
Figs. 2.1 and 2.3, it seems plausible to expect an annual growth rate over that time period
of between 12 and 18% - higher at first, and declining as China’s economy catches up
with the industrialized world.4
Fig. 2.4 subdivides consumer credit into four major categories, looking at the
flows that finance the purchase of these separate forms of household capital stock. To
give a closer view of the other three components, Fig. 2.5 omits home mortgages. Home
mortgages are over 70% of the total, and that share is still steadily rising, reflecting a rise
in the individual home ownership rate from 44% in 1945 to over 67% in 2001 (CUNA-
Fig. 2.4: Components of Consumer Credit, 1968-1999
50 Credit Card
40 Mortgage Credit
1965 1970 1975 1980 1985 1990 1995 2000
Credit Card: Federal Reserve Statistical Release: http://www.federalreserve.gov/
Table G.19 Consumer Credit Outstanding – Revolving.
Mortgage Credit: GPO Access: http://www.gpoaccess.gov/ TABLE B–75.—Mortgage debt outstanding by
type of property and of financing, 1945–2003 Nonfarm Properties: 1- to 4-family houses.
Automobile Credit: Federal Reserve Bank of St. Louis - Economic Research: http://research.stlouisfed.org/
Economic Data-FREDII: Commercial Credit: Total Automobile Credit Outstanding.
Education Loans: U.S. Department of Education - Financial Aid Professionals: http://www.ed.gov/
OPE Program Data: Federal Student Loans Programs: Table 5 Federal Family Education Loan (FFEL)
program annual and cumulative commitments, by loan program type: FY66-FY00. Educational loans for
1960-89 are interpolated from incomplete data. Totals sum to less than 100% due to omitted categories
(such as department store credit and home improvement loans).
This is consistent with the prediction in the conference paper by Reynolds, Tu and Wang, which projects near-term
growth (2004 and 2008) at 20% per year or higher.
Fig. 2.5: Components of Consumer Credit, 1968-1999
1965 1970 1975 1980 1985 1990 1995 2000
Source: Figure 2.4
When we look in detail at the three smaller parts of household credit, we see that
automobile loans are a relatively constant share, while educational loans rise steadily but
modestly, and credit card borrowing has skyrocketed in the last thirty years. Household
credit as a whole has experienced phenomenal growth in the past fifty years. This is
largely because over time, ways have been found to extend credit for more and more
purposes, and to more and more households: in 1956, only half of all households used
consumer credit, where today more than 75% do (Luo & Sun p.4).
What made this expansion possible? In part, this is a technology story, in particular
the technology of generating credit ratings. Three conference papers (Niu, Shen and An)
focused heavily on the increasing sophistication of U.S. credit scoring methods. The
growing ability of infotech to collect, store, transmit and analyze payment histories, and
the increasing sophistication of statistical models of risk, have fed off each other, until
today most decisions on the extension of consumer credit are made automatically, by
computer, based on nationally standardized data sets and credit scoring models.
The other part of the story, especially for credit card debt, has been the interaction
of the credit card industry and government in developing regulatory institutions. For
example, by 1970, it was increasingly clear that the segmentation of the banking system
embodied in the Glass-Steagall Banking Act of 1933 needed to be reformed. But the
vested interests established by that act – principally the small, local banks – fought a
tenacious rear-guard action in the Congress. In this setting, in the years immediately
following 1970, the credit card sector emerged as a way around the regulators: a way to
have coast-to-coast banking despite Glass-Steagall. To that extent, one can fairly say that
the technological innovation of the credit card, exploited by the private sector, drove
government to reform the banking industry more quickly than might otherwise have been
the case (Luo & Sun Section III).
The story of consumer credit in the United States, then, is a story of changes in
technology, in attitudes, in the nature of U.S. household production, and in institutional
and regulatory practices, all of which have had the effect of dramatically shifting the flow
of credit away from government and toward the private sector. To label the household
portion of this flow “consumer credit” risks missing the fact that investment decisions –
to purchase a house, a car, a VCR, or an education – are being made. The decision-
makers are individual households, rather than government or business. To the extent that
those decisions are based on particular, widely dispersed information that is unavailable
above the household level, we believe that investment funds are being allocated more
efficiently today as a result of the swing toward consumer credit. For example, housing
built in for the home ownership market is more likely to mirror the preferences of the
buyer than housing for the rental market. Education purchased through loans, as opposed
to education freely obtained (because government is doing the educational borrowing), is
more likely to be aimed at increasing marketable human capital with which to service the
As the final stop on this tour of the U.S. experience, Fig. 2.6 shows the seven
institutional ways in which credit is extended to U. S. households. As we can see,
nonfinancial businesses’ share declined steadily after WWII, as department store
consumer financing was displaced by commercial bank and credit card lending. Savings
institutions never loom large, and since the end of the Glass-Steagall era their share is
withering. Yet amid all this turmoil, credit unions and finance companies have
maintained a consistent market share vis-à-vis commercial banks. Underlying their their
resilience is a lesson for Chinese policymakers.
Fig. 2.6: Major Holders of Consumer Credit Outstanding, 1943-2004
40 Federal Government and Sallie Mae
30 Savings institutions
20 Nonfinancial business
P ools of securitized assets
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Source: Federal Reserve Statistical Release – G. 19 Consumer Credit
We believe5 that these three institutional forms occupy three distinct market
niches, representing an of institutional response to potential market failure. Some
households may be particularly wary of borrowing because they recognize that the lender
is more sophisticated, and more capable of calculating the true price paid by the
borrower, than they are. These households will naturally gravitate to the credit union
sector. There, because the institution is non-profit and the membership is homogeneous,
they may rightfully expect that they’re protected from opportunistic behavior by the
lender. Meanwhile, the credit union lenders enjoy advantages that offset the extra costs
of their smaller scale of operation. For example, loan delinquencies at commercial banks
are reported to be 34% higher (1.14% vs. .89%) than at credit unions (CUNA-Mutual p .
7). This is very likely due to better information, monitoring, and incentives in credit
Similarly, some households are intrinsically worse credit risks than others:
disorganized, irresponsible, and slow to repay. Finance companies, because they are
small-scale and local, can employ a much more intensive and effective monitoring
technology than a commercial bank would use. The higher costs are passed along in the
higher interest rate. The useful lesson from all of this, for China, is that one size does not
fit all household borrowers. On the contrary, government should anticipate that if the
Much of what follows flows from helpful conversations with William Kelly.
regulatory environment is open to entry, and innovation is allowed or even encouraged, a
usefully wide range of institutional responses will emerge.
Some Chinese observers at the conference wondered whether the different U.S.
institutional forms were specialized in financing different product types – that is, whether
the divisions in Fig. 2.6 reflect the divisions in Fig. 2.5. Such specialization doesn’t seem
a prominent explanation. For example, consumer lending by U.S. credit unions in 2001
spread over automobile loans (40%), mortgages and home equity loans (40%) and
unsecured and other loans (20%) (CUNA-Mutual 8).
On balance, the conference participants viewed the U.S. experience with
household credit as quite successful.6 We now turn to China’s experience.
3. Development of consumer credit in China after 1997
Before the Asian Financial Crisis broke out in 1997, consumer credit in China was
experimental: slow growing, small scale, with few product types (only mortgage loans,
auto loans and student loans). The crisis generated large macroeconomic shocks for
China. Exports sharply decreased, consumption and investment demand declined, and
unemployment increased. In response, the Chinese government carried out macro policies
targeted at increasing domestic demand, including supporting and encouraging
commercial banks in the consumer credit business. Since then, consumer credit has been
on the agenda of the commercial banks. Its development has had the following
First, growth has been rapid, and the share of consumer loans in total bank lending
has risen rapidly. The balance of consumer credit in China increased from RMB 17.2
billion in 1998 to RMB 1,573 billion up to the end of 2003(Figure 3.1), increasing by 90
times in five years. The average annual rate of growth was 112%. The growth rate was
326% in the first year, 1998. As the total balance grew, these growth rates gradually
slowed down, decreasing to only 47% in 2003.7
Note, though, Nicola Jensch’s paper, which favors European privacy laws over U.S. laws.
Cheng Jiansheng and Liu Xiangyun, Developing consumer credit and promoting consumption , 2003.7, Research
Bureau of People’s Bank of China
With such rapid growth, the share of consumer credit in banks’ loan portfolios rose
steadily, from only 0.85% in 1998 to 9.9% in 2003.8 (Figure 3.2) The Construction Bank
of China, the first one to develop consumer credit, had the highest share, 17.1%. In the
Industrial and Commercial Bank of China, whose absolute balance of consumer credit
was the largest, the share in the bank’s portfolio was 12.2%. Consumer credit has now
become an important market for Chinese commercial banks. Each bank has subdivided
their original credit operations, setting up retail divisions, individual financing divisions,
mortgage loan divisions, and bank card centers especially for consumer credit.
Fig. 3.1: Consumer Credit Outstanding, 1997-2003
RMB 0.1 billion
1997 1998 1999 2000 2001 2002 2003
Source: People’s Bank of China Annual Reports
Table 3.1: Share of Consumer Loans in Total Bank Loans (1997-2003)
Source: People’s Bank of China Annual Reports
Data in 1997-2002 have the same source as 1; data in 2003 come from “A report on the trend of consumable good
market in 2004”, Commercial Ministry, www.xinhuanet.com, 2004.3
Second, the full range of consumer credit loans has emerged, including lending
for mortgages, education, large durable goods，home improvement, autos, travels,
healthcare, real estate deposits and composite consumer loans.9 Fig. 3.2 illustrates this
Fig. 3.2: Structure of Consumer Loans in SOCBs (2003)
12.13% mortgage loan
composite personal loan
Source: PBOC data
Individual mortgage loans occupy the biggest share of consumer credit, averaging
75% of the total over 1998-2003. The total for mortgage loans, RMB 1,178 billion at the
end of 2003, had increased 42% over 2002 and 28-fold over 1998, and risen to over 6%
of GDP. Because the term of mortgage loans is long, and also because individual
willingness to repay is stronger than for firms, the non-performing loan (NPL) ratio is
Composite personal loan is an unsecured loan where the purpose of the loan is not specified to the lender. Such loans
were widely used to fund speculation, and consequently were abolished in 2001, although some outstanding balances
evidently remain on the books.
very low, only 0.5%.10 There is no doubt that this delights the state-owned commercial
banks (SOCBs), which are heavily burdened with non-performing loans. Indeed,
individual mortgage loans have become their most important and most hotly contested
product. Of the four SOCBs’ RMB 1,236 billion balance of consumer credit in 2003, the
share occupied by mortgage loans had risen to 79%. 11 According to a Chinese
government projection, by the end of 2005 housing mortgage lending will occupy 15% of
total bank lending (CUNA-Mutual p. 11).
Auto loans come second. These loans began in the 1990s. The financial
institutions that extend auto loan include commercial banks, the finance companies of
auto conglomerates, and auto finance companies. Since China’s entrance into the WTO,
automobile sales have risen rapidly, and projections are that China will soon be the
world’s fourth largest automobile producer. But as of early 2003, only 10 to 20% of that
spending was supported by loans, compared with 70% in Europe and North America12.
Still, the automobile market has been effectively stimulated by credit availability.13 The
balance of auto loans was RMB 43.6 billion in China in 2001, increasing to RMB 94.5
billion at the end of 2002, and roughly doubled in 2003 to RMB 180 billion.
Credit card credit lending is relatively small, but with a huge growth potential.
The total number of bank cards has grown rapidly, from 8.4 million in 1994 to 496
million in 2002, and total transaction volume increased from RMB 520 billion to RMB
11,560 billion in that time.14 But only 1.6% of this transaction volume in 2002 was
consumer credit, and virtually none of that was revolving credit.15 Bank cards were being
used mainly as electronic currency. Of these bank cards, 95.8% in 2002 were debit cards,
capable of transferring funds and making deposits and withdrawals, but with no credit
element. Even regarding the remaining 4.2%, or 25.9 million, with which credit
purchases could be made, the great majority of these required that a countervailing
balance be maintained on deposit in the bank.16 This slow growth is partly due to
government concerns about the risks of financial instability such as South Korea
Data source: Statistical report of People’s Bank of China
People’s Bank of China: A investigation report on individual consumer credit market
South China Morning Post April 23, 2003.
Su Qin, Problems and Solutions of auto loan market, Automobile Industry Research, 2004.4
Data source: “The three trends of the development of bank cards in China in 2004”, www.chinaunionpay.com
See footnote 7.
Data source: calculated from “A quarterly report on the situation of the development of China UnionPay” of the
third quarter in 2003
experienced when its stock of credit card debt proved to be non-performing. Partly this
reflects the very high rate of household savings, most of which ends up in low-interest
SOCB accounts. Households that have large bank balances in savings accounts would be
foolish to pay high interest on credit card debt rather than using a debit card instead.
During 2003, true credit card lending grew more rapidly. There were about 4.8
million credit cards in use at the end of that year, an increase of 3.25 million over 2002
(or a growth rate of 209%). The average annual transactions amount per card was about
RMB 7,400, far more than that of debit cards.17
The share of student loans is small and has developed slowly. The Chinese
government offers two sorts of student loans: a market interest rate loan (introduced in
the late 1980s) and a means-tested, interest-subsidized loan (beginning in 1999). From
1999 to 2001, the cumulative amount of subsidized student loans was RMB 1.44 billion,
which supported 379 thousand students, with the help of further funding from colleges
and universities. Unsubsidized loans added RMB 1.9 billion.18 By February 2004, these
numbers had risen to RMB 5.2 billion and RMB 2 billion respectively.19 Table 3.2
summarizes this information on the structure of product types in consumer credit.
Table 3.2 The Structure of Consumer Credit, 2001-2003(%)
Year type Mortgage loan Auto loan Student loan Other composite loan
2001 82.95 6.23 0.40 10.42
2002 77.4 10.78 0.50 11.32
2003 74.87 11.44 0. 42 13.27
Sources: 2001-2002: Cheng JianSheng and Liu Xiangyun, Developing consumer credit and promoting consumption,
2003.7, Research Bureau of People’s Bank of China. Education loans for 2003 is calculated by subtracting the
additions to educational loans in January and February, 2004 from the stock at the end of February, 2004.
Data source: “The three trends of the development of bank cards in China in 2004”, www.chinaunionpay.com
Monetary Policy Office of People’s Bank of China, A report on the development of consumer credit in China, 2002.3
Statistical Data form the headquarters of People’s Bank of China, Financial Market Office of People’s Bank of China
In Section 2, we saw that in the United States, consumer credit is provided by a
range of financial institutions. In China, by contrast, consumer credit is monopolized by
the four large state-owned commercial banks (SOCBs). Through the end of 2002, they
accounted for 85.6% of the total, and 81% of auto loans as of November 2003.20,21 The
Bank of China has been particularly successful at expanding its market share, extending
RMB 94B in mortgage loans in 2003, a 36% growth over 2002.22
The two other delivery vehicles for consumer lending, credit unions and finance
companies, which are so persistent in the U.S. case, are basically absent in China. The
Chinese analogue of the U.S. finance company sector is the gray-market lending sector,
described in the conference paper on informal mutual finance associations (Mingquan
Liu et al). But this sector is small, and barely tolerated by the government. Indeed, in
one of the strongest exchanges at our conference between “officials” and “activists”, a
representative of the Chinese Bank Regulatory Commission (CBRC) insisted vehemently
that any lender that was not regulated by the government was “illegal”.
As for credit unions, the Rural Credit Cooperatives (RCCs) would appear to be the
Chinese analogue of U.S. credit unions. But the coincidence of names is deceptive.
RCCs were genuinely cooperative institutions when first established, before World War
II. But the RCCs in China have been completely absorbed into the government banking
system. Indeed, at one point in the 1990s they were explicitly merged into the
Agricultural Bank, before being moved in 1996 to the PBOC, and from there to the
CBRC in 2001.
Cheng Jiansheng and Liu Xiangyun, Developing consumer credit and promoting consumption, Monetary Policy
Bureau of People’s Bank of China, 2003.7
Commercial banks will fade out from automobile sector, Shanghai Securities News, 2004.1.5
He Ping: Bank of China has extended nearly 100 billion loans, Beijing Xianzai Commercial News
Enjiang Cheng knows the Chinese RCC sector intimately. His paper for the
conference describes the needs of the sector, its limited potential, and the frequent
reforms of the RCC system in the past ten years. He concludes that the RCC reforms are
“crippled by fundamental problems and contradictions”.
The sad state of the RCC sector also means that relative to urban areas, the rural
areas, where more than half the population lives, are starved for consumer credit. A 2003
survey in Shandong showed that 70% of the peasants there were eager to access
consumer credit.23 A county-based survey showed that more than 90% of consumer credit
goes to towns and less than 10% to the countryside. The only promising, market-oriented
and potentially profitable part of the RCC sector is the urban RCCs in large cities such as
Beijing, Shanghai and Shenzhen (see CUNA-Mutual p. 15-18).
3. Suggestions for Policymakers and Practitioners
A. Regional and urban-rural inequality
Development of consumer credit in China is regionally uneven. It is growing
quickly in the developed coastal areas, and slowly in the central and western areas.
Nationally in 2001, consumer lending as a percentage of all loans was 6.5%. But
the four heavily populated central provinces of Hubei, Hunan, Hebei and Henan
averaged little more than 2%, while the average was nearly 10% in the rapidly
growing and highly commercialized provinces of Guangdong, Fujian and Zhejiang
and the cities of Beijing and Shanghai (He p. 16). These five regions, with 14.7% of
China’s population, were absorbing 61% of consumer credit (RMB 192 billion) as
of November 2000.24 Some types of credit are simply unavailable in some
Data source: Project team of the subbranch of People’s Bank of China in Yishui County, Shandong province, A
simple anal ysis of the development space of rural consumer credit market, China Rural Credit Cooperatives,
People’s Bank of China: A report on the development of consumer credit, 2001
regions. For example, student lending has still not been launched in some western
areas, so students there cannot get student loans.
One major reason for this state of affairs is that government regulations restrict
mortgage and other lending to the region where the financial institution is located.
To some extent this reflects an implicit market-sharing agreement among the
SOCBs. To some extent, provincial protectionism is to blame. Chinese regulators
could reduce regional inequality if they broke down those barriers.
The problem of rural access to credit is less tractable. This inequality stems in part from
the problems of rural poverty in general. Banks can’t easily be induced to lend to
households with low incomes, low education, and little or no credit history. But part of
the problem is also institutional: the rural credit cooperative (RCC) sector.
Consider these institutions. There are 50,000 of them. Each absorbs farm savings
within its district, and is prohibited from lending outside its district. RCCs have no real
owners: the directors and managers have no real stake, and the link to supervision from
above has shifted five times since 1996: from the ABC to the Inter-ministry Rural
Financial Reform Group, to the PBOC, to the CBRC, to the RCC Federation. The moral
hazard problems here are far more severe than with the SOCBs, because of the small
scale, diffuse supervision, and a clear policy commitment to protect the savings of poor
farm households. Thus one first step in providing rural credit would be to create
institutions that were actually expected to conserve assets carefully and lend them wisely.
This would require that they be permitted to make a profit, as RCCs today are not.
One study estimates that given their high risks and transactions costs, RCCs need to
charge a 12-15% interest rate to break even. Currently RCC rates are capped at 10%
(Cheng and Xu).
B. Information Problems
China has no nationwide consumer credit reporting system. In June 1999, a credit
reporting agency (Shanghai Credit Information Services) was established experimentally
by the Shanghai PBOC branch. It now reports on five million households, with
comprehensive access to their payment histories. In Beijing, similar experimentation
started in 2002. Shenzhen has written regulations permitting the sharing of payment
records (Jentszch). But aside from Shanghai, these steps have been rather slow and
halting. The lack of a uniform nationwide consumer credit rating system clearly limits
the household credit sector.
The government understands this, and in 2003 the PBOC instructed the four SOCBs
to construct a national system “within two years. A new 17-digit individual ID number is
now in use. But we expect that progress in this area will be slow, in part because of a
widespread view among Chinese that lenders should not share payment histories with
others. Thus up to the present, information in the hands of employers and vendors on
individuals’ payment behavior cannot be shared with banks.
Consumers’ very understanding of the nature and importance of credit is itself weak.
Loan applicants regularly falsify their income levels. Some borrowers, although perfectly
able to repay, deliberately default. In sum, there is severe information asymmetry and
consequent risk among banks, consumers and products providers. The conference
presenters included specialists with much to teach China about the technologies and
methodologies for generating credit scores (papers by An, Shen and Niu). As this
institutional and regulatory vacuum became clear to us, those papers seemed very
C. Product diversity and transaction costs
Consumer credit in China consists mainly of residential and auto loans. Within
these two categories, almost all lenders adopt a common installment structure, without
the variations that might accommodate differing income levels or preferences.
China’s banking sector traditionally engaged in wholesale loans to enterprises. The
consumer credit business is still a novelty to them. Banks thus lack management
experience and specialists in this area, which deals with thousands upon thousands of
families. This makes banks hypersensitive to risks when extending consumer loans.
They become strict about qualifications and procedures, requiring collateral, assessments
and insurance for each and every loan, making loan application procedures complex and
burdensome. For example, to get durable goods credit, banks now require applicants to
provide a residence as collateral, or deposit receipts or T-bonds as collateral security, or a
firm acceptable to the bank that will act as guarantor. The ”Regulation on Individual
Mortgage Loans” prescribes that when used as collateral, a house must carry additional
insurance. In addition, mortgage loans face numerous taxes: 3-6% of the purchase price
as a credit investigation fee; 11% as a house assessment and registration fee; 2-9% as a
comprehensive security fee (for borrowers without a third party guarantor); a loan
contract notarization fee; and so on and on.25
D. The secondary market in securitized assets
Consumer credit is characterized by small scale, high costs and great risk. Credit
risk is especially high for residential and auto loans in China. The fluctuation and
instability of personal incomes in some sectors and regions is severe, increasing default
risk for mortgage loans. In some developed countries, commercial banks sell consumer
credit packaged or securitized to cash high-risk and low-liquidity assets in a secondary
market, which properly matches assets with debts and risks with returns. But thus far
there is no secondary market for consumer credit instruments. Banks can control risks
only by collateral or through third party guarantee.
These two methods both have obvious defects. First, the liquidity of collateral is
low. Provision 53 in the “Assurance Act of the People’s Republic of China” says that if a
creditor is not repaid when the obligation becomes due, he can negotiate with the
mortgager to liquidate the collateral through sale or auction it to repay, and that if
negotiation fails, the creditor can appeal to the courts. But in practice, because of this and
that reason, banks find it hard to reach agreement with mortgage holders, and the courts
always give priority to the problem of social stability when passing judgment.
Regulations on consumer credit are few, and vague. For example, when borrowers
default, regulations offer little guidance on how to deal with particular problems such as
converting collateral and collateral security to compensation for interest and principal. It
An in-depth analysis of the costs of mortgage loan, People’s Daily, 2001.11.28
is difficult for banks to even begin the process with no legal support. Even when banks
get permission to dispose of collateral, it is difficult to liquidate it collateral for the full
value when collateral trading is still not marketized, regulated and institutionalized.
Banks management costs are high.
Secondly, third party guarantees cannot fully compensate for consumer credit losses.
Banks usually require an insurance company to provide coverage when the banks extend
residential or auto loans. But there are some circumstances under which the insurance
companies will not compensate for losses caused by borrowers’ default, and in any event
they seldom compensate at full value. Particularly because of the severe moral hazard to
policy-holders, and the widespread fraud in automobile insurance claims in recent years,
insurance companies are mostly unwilling to offer automobile insurance.
E. Privacy legislation26
As noted above, surveys in China regularly reveal a widespread public view that
personal financial information should not be revealed to lenders, and consequently a
public confidence that a bad payment history will not restrict their ability to borrow. One
institutional response to this situation in other countries has been the passage of privacy
legislation that spells out clearly what sorts of personal information can be transferred or
sold to a third party, under what circumstances.
No such systematic law has yet been passed in China. There exists only an
incoherent and scattered legal basis for privacy. Constitutional clauses (Articles 37-40)
protect privacy of various sorts, and China’s Supreme Court has several times stipulated
that a privacy right exists, but it has never squarely defined that concept. Administrative
regulation of the banking industry protects information about deposits. But nowhere does
civil or administrative law address the question: where does this vaguely defined right to
privacy end, and where does the public interest in free information flow begin?
Aspects of China’s culture, history and legal tradition stand in the way of
developing such a law. It’s not easy to find language in Chinese that captures the idea of
“personal information that appropriately remains secret”, as distinct from “shameful
This section follows the paper by Jentszch
personal information that only the individual would wish to hide”. This combines with a
legal tradition within which the county magistrate, the local arm of an all-powerful
emperor, routinely used torture to extract information from any and all parties to a court
dispute. This traditional and cultural bias toward very low privacy protection readily
supported the invasive institutions of the Maoist era - for example, the ubiquitous
neighborhood committees, “to whom all desires were known and from whom no secrets
It’s entirely understandable, then, that this generation of Chinese, clear privacy
legislation seems to be neither a routine law to write, nor a reliable bulwark once written.
Still, until such legislation emerges, spelling out what information can be transmitted and
what cannot, banks and other credit providers (aside from a few experiments such as
Shanghai) have been understandably loathe to test the limits. China’s interest in a range
of international treaties since 1997 signals an intention to work through these issues – for
example, it has signed the International Covenants on Economic, Social and Cultural
Rights, and on Civil and Political Rights, with implications for privacy issues.
In these and other areas, the non-Chinese conference participants were extremely
reluctant to be dogmatic in prescribing solutions for China’s household credit sector. We
were mindful that China shares with other industrializing countries a long history of in
appropriately borrowed institutions and technologies. In the end, these systems must
always grow up through a long process of experimentation, with which the foreign
practices and prescriptions can be compared with the actual experience in China, and
government-designed institutions can provoke, and be modified by, the reactions of
private market participants. Section 4 concludes by elaborating on these ideas, using the
experience of the U.S. credit card sector as an example of that interaction.
4. Some Conclusion
The standard approach within economics to understanding the nature and role of
institutions – a literature alluded to at the beginning of this paper - follows Ronald Coase,
Oliver Wiliamson, Douglas North and the theory of transactions costs. But there is a
simpler, more direct way to understand the nature of institutions and the interplay
between institutional change and technological change. The production process through
which human societies ensure and improve their material existence was initially and
primarily a matter of individual people interacting with the material world – the farmer’s
hoe, the forester’s ax. But any production process other than Robinson Crusoe’s also
involves interaction among people. The farmer sells some grain to others, in the town
where the forester buys his ax blade from others.
Unlike a tree or a lump of sod, people are profoundly unpredictable. Wherever the
production process depends critically on human interactions, institutions emerge to cope
with that unpredictability, laying down rules, norms, habits of behavior on which we can
all depend. Market institutions – our readiness to accept fiat money for goods, our very
understanding and acceptance of what a price is – are so universal and familiar that we
hardly notice them as institutions at all. They are like the air we breathe.
Thus all productive activity goes forward only through a mix of technology and
institutions. Although we may think of ours as increasingly a “hi-tech” economy, the
truth is that over time, that mix has been weighted ever more heavily towards institutions
rather than technology. The shift from an agricultural to an industrial society entailed
economies of large scale production, and large scale meant complex human interactions.
The shift from an industrial to a service society continued this process. Characteristically,
a service involves not so much an interaction with the material world – wresting a crop
from the soil, or felling a tree – but some more subtle activity such as bringing the crop to
market at retail, or storing the wood for later sale.
Now consider the financial services sector. At the heart of any financial product lies
nothing material at all, but merely an idea: a promise to repay, a commitment to complete
a transaction at some future date. Like some Texan rancher who is “all hat and no
cattle”, surely at this point we come close to a production process that is “all institutions,
China has been preoccupied with technology borrowing for the last 150 years, ever
since British gunboats on the Pearl River emphatically demonstrated the importance of
technology to national sovereignty. That borrowing process has accelerated dramatically
in the last fifty years, and especially since 1978. The primary reason that it has taken so
long is that technological changes demand institutional changes as well – changes in the
rules governing human interaction, in China’s cultural norms and social compact. Such
change is slow. Like other latecomers to development, China’s acquisition of industrial
technology was difficult and delayed. But now China is approaching the technology
frontiers. The best evidence of this is her growing ability to absorb and implement
financial services technologies, which are so institutionally saturated.
At that point – when the potential for growth through technology borrowing
approaches exhaustion – China faces a critical transition: from borrower to innovator.
The work of Alexander Gerschenkron (1961) and his intellectual descendents taught us
that borrowers heavily use government to catch up. The role of government in China’s
modernization is surely the best support to date of that theory. But the hand of
government, so strong and effectual in forcing high saving rates after 1949, in crafting
special economic zones and putting together a modern central bank after 1978, can be a
heavy hand, a deadening presence, when the need is to foster and stimulate individual
initiative and domestic innovation.
This theme arose often in our conference papers, and particularly in those papers
that charted the role of government in creating and regulating the institutional
arrangements in the U.S. financial sector. Consider the birth of the credit card industry in
the twenty years after 1958 (Luo & Sun). In the heavily regulated environment of post-
Depression banking, Diners Club and American Express in the 1950s exploited a
definitional loophole, reintroducing a form of interstate banking by defining their card as
providing merely “payment services” rather than credit. In 1958, BankAmerica
borrowed the business concept of revolving credit, married it to this household credit
instrument, and used the franchise method to create a true nationwide credit card.
Through the 1960s, as banks rushed to exploit the potential of this new market, a
classic, chaotic, unregulated free-for-all ensued. BankAmericard and MasterCharge
mailed out cards to any and all, with no risk management systems, leading to high credit
risk, widespread fraud and massive losses. In 1970, the key institutional breakthrough –
a non-stock, member-owned, for-profit licensing agent, National BankAmericard Inc. -
transformed this troubled product into today’s credit card.
No government agency issued rules describing these new institutional forms,
perhaps because the idea of “economic deregulation” was already in the air. Instead,
market competition and lawsuits within the private sector forged the new structures. Not
until 1998 did the Justice Department enter the fray, filing a lawsuit to pry open a
competitive space, within which four card providers may perhaps thrive instead of
today’s big two.
What lessons can China learn from this experience and others? First, in the area of
effective government regulation of the financial sector, the United States holds no
monopoly on virtue. In the 1950s, the post-Depression Glass-Steagall regulatory
structure was clearly undesirable, and yet it persisted for another two decades, a vivid
illustration of the ability of regulations to create vested interests that then forestall needed
change. Indeed, that tension, between an obsolete regulatory structure and the financial
needs of a national economy, partly explains the explosive growth of the credit card form.
A more important conclusion is this: institutional and technological innovation
proceeds best in an environment where government’s regulatory hand is light and
indulgent. The Justice Department held its hand for twenty-five years, declining to
intervene in 1974, and then eventually doing so in 1998, without losing its ability to
In thinking about optimal institutions for household credit, then, China might wish to
imagine the challenge as a two-stage one. The particular, detailed institutions may best
be worked out at the grass roots level, through fractious interaction of private agents and
local governments, at times calling on the court system as mediator. The task of the
national government might best be thought of as creating a meta-institution: the rules
governing how government regulates. And the best rules will enable all parties, private
and public, to actively articulate their positions and pursue their interests.
A. Papers from the August 2004 Conference on Household Credit
Mark An: Consumer Credit and Residential Mortgage Finance in the U.S.
Enjiang Cheng: Expanding Microfinance Through Rural Credit Cooperatives
Nicola Jentzsch: Privacy Protection in the U.S. and Europe: Lessons for China
Mingquan Liu, Jiantuo Yu, and Zhong Xu: The Impact of Mutual Finance Associations on Farm
Zhigang Liu: The Development of Mortgage Loans in China
Jack Niu: Managing Risk in the Consumer Credit Industry
Minggao Shen: Are Rural Households Credit Constrained?
Bruce Reynolds and Wenli Li: Student Loans and Equality of Higher Education Access
Bruce Reynolds, Yonghong Tu and Yu Wang: Applying the U.S. Experience to China: 5-year
and 50-year Predictions
Bingxi Shen and Xianting Wu: Consumer Credit and Regional Development in China
Edward Shen: Risk Management for Deposit Accounts in U.S. Commercial Banks Companies
Guofeng Sun and Yanchun Zhang: The Linkage between Household Credit and Macro Control
Sherry Sun and Ning Luo: Interplay between Market Forces and the Legal-Regulatory
Framework in China and the United States
Zhong Xu: Consumer Credit, Domestic Savings and Small and Medium Enterprise Financing
B. Other References
CUNA-Mutual. 2002. Report of the Joint Project Team on RCC Consumer Lending and
Gerschenkron, Alexander. 1961. Economic Backwardness in Historical Perspective.
Harvard University Press.
Mulligan, Casey. 1997. Parental Priorities and Economic Inequality. Chicago U Press.
Liping He and Fan Gang. 2002. “Consumer finance in China: Recent Development
Trends”, China & World Economy November 6 2002
International Workshop on Household Credit
China Center for Economic Research, Peking University
Department of Economics, University of Virginia
August 7, 2004
China Center for Economic Research, Peking University, Beijing, China
International Workshop on Household Credit
August 7, 2004
China Center for Economic Research, Peking University, Beijing, China
08:30-08:45 Opening Remarks
Chair: Jianglian Wu Professor, DRC
Justin Yifu Lin Professor and Director, CCER, Peking University
Bruce Reynolds Professor, Department of Economics, University of Virginia
08:45-10:45 Panel I. What Institutions Are Critical to the Consumer Credit Sector,
and How Have They Evolved?
Chair: Gang Yi Professor and Director, Monetary Policy Department, PBOC
08:45-09:10 Managing Risk in the Consumer Credit Industry
Jack Niu Executive Vice President, MBNA America
Discussant: Guochu Tang Credit Evaluation Department, China Industrial and
09:10-09:35 Risk Management for Deposit Accounts in U.S. Commercial Banks
Edward Shen Vice President, Consumer Risk Management, Wells Fargo Bank
Discussant: Jian Wu Risk Management Department, China Construction Bank
09:35-10:00 Consumer Credit and Residential Mortgage Finance in the U.S.
Mark An Director of Economics Research, Credit Policy, Fannie Mae
Discussant: Xianxin Zhao Debt and Asset Management Department, Bank of China
10:00-10:25 Interplay between Market Forces and the Legal-Regulatory Framework: Case
Studies in the Development of the US Credit Card Industry
Sherry Sun and Ning Luo Vice Presidents, Risk Management, Citi Cards, Citigroup
Discussant: Qun Xie Associate Professor, School of Economics and
Management, Tsinghua University
10:25-10:45 Open Discussion
10:45-11:00 Coffee Break
11:00-12:30 Panel II. Consumer Credit and China
Chair: Kang Jia, Professor and Director, Institute of Fiscal Policy
Studies, Ministry of Finance
11:00-11:25 Development Trend of Individual Consumer Credit in the Coming Five Years in
Bruce Reynolds Professor, Department of Economics, University of Virginia;
Yonghong Tu Associate Professor, School of Finance, People’s University; and Yu
Wang Professor, Financial Markets Department, PBOC
Discussant: Zhenhua Mao President and CEO, China Chengxin Credit
11:25-11:50 Information Privacy: Best Practices for the Chinese Consumer Credit Reporting
Nicola Jentzsch Free University of Berlin
Discussant: Cunzhi Wan Deputy Director, Credit Information System
11:50-12:15 Does a Large and Expanding Consumer Credit Sector Increase or Decrease the
Ability of Monetary Policy to Ensure Smooth Economic Growth?
Guofeng Sun PBOC and Yanchun Zhang Assistant Professor, San Francisco State
Discussant: Jianhuai Shi, Associate Professor, CCER, Peking University
12:15-12:30 Open Discussion
13:30-15:00 Panel III. How Severe are Rural Credit Problems, and How can the
Consumer Credit Sector Help in this Area?
Chair: Jun Han, Director, Department of Rural Economy, DRC
13:30-13:55 Credit Constraint and Household Financing: Panel Data Evidence From Rural
Minggao Shen CCER, Peking University
Discussant: John Giles Assistant Professor, Department of Economics,
Michigan State University
13:55-14:20 Mutual Finance Associations and Farm Household Expenditure Patterns
Mingquan Liu Professor, Nanjing University, Jiantuo Yu Nanjing
University, and Zhong Xu Associate Professor, Financial Stability Bureau, PBOC
Discussant: Jianbo Chen Professor and Division Director, Department of Rural
14:20-14:45 Expanding Microfinance Through Rural Credit Cooperatives
Enjiang Cheng Senior Research Fellow, University of Victoria
Discussant: Junfeng Li Deputy Director, Cooperative Finance
Supervision Department, CBRC
14:45-15:00 Open Discussion
15:00-15:15 Coffee Break
15:15-17:15 Panel IV. Broader Policy Issues Raised by the Growth of Consumer Credit
Chair: Bing Xia, Director, Institute of Financial Studies, DRC
15:15-15:40 Consumer Credit and Regional Development in China
Bingxi Shen Deputy Director, Financial Markets Department, PBOC and
Xianting Wu Financial Markets Department, PBOC
Discussant: Fuan Li Deputy Director, Supervisory Rules and Regulations, CBRC
15:40-16:05 The Development of Mortgage Loans in China
Zhigang Liu Governor, Hebei Branch, Industrial and Commercial Bank of
Discussant: Mark An Director of Economics Research, Fannie Mae
16:05-16:30 Consumer Credit, Domestic Savings and SME Financing
Zhong Xu Associate Professor, Financial Stability Department, PBOC
Discussant: Jun Wang Senior Economist, Beijing Office, The World Bank
16:30-16:55 A Preliminary Analysis on Student Loans and Access Equality in China
Bruce Reynolds Professor, Department of Economics, University of Virginia, and
Wenli Li, Associate Professor, School of Education, Peking University
Discussant: Andrew Watson, Professor and Chief Representative, Ford
Foundation Beijing Office
16:55-17:15 Open Discussion
17:15-17:30 Coffee Break
17:30-18:30 Summary Session and Roundtable Policy Discussion
Justin Yifu Lin Professor and Director, CCER, Peking University
Bruce Reynolds Professor, Department of Economics, University of Virginia
DRC The Development Research Center of the State Council, China
PBOC The People’s Bank of China
CBRC China Banking Regulatory Commission