The year 2024 is poised to be a pivotal one for the consumer finance sector in China, marked by both formidable challenges and promising opportunities.

Amidst macroeconomic policies aimed at bolstering consumption, consumer finance companies have become essential players in this financial landscapeWith the backing of national policies, these institutions are not only widening their financing channels but are also significantly reducing their financing costsThis year, a preliminary tally indicates that these companies have issued asset-backed securities (ABS) totaling over 20 billion yuan, with interest rates remaining below 3%. Furthermore, they have also raised more than 50 billion yuan through financial bonds, setting record highs for both issuance scale and volume, with interest rates dropping to approximately 2%.

Diversifying Financing Options

The momentum behind increased financing has been bolstered significantly this year, with companies striving to tap into diverse funding sources

As reported up to December 26, several prominent consumer finance entities including Zhaolian, Xinyi, and Bank of China Consumer Finance have collectively issued 31 batches of financial bonds, amounting to a total of 52.4 billion yuan.

Specifically, Zhaolian Consumer Finance led the way with 6 issues totaling 11.4 billion yuan, followed by Xinyi with 9.5 billion yuan from 5 issuesBank of China Consumer Finance also issued bonds totaling 8.5 billion yuan across 5 issuancesOther notable companies like Haier Consumer Finance and Ningbo Yinlong each made smaller yet significant contributions of around 1.5 billion to 1 billion yuan.

According to reports issued by China's Monetary Network, Haier Consumer Finance is planning to issue 4 billion yuan in financial bonds, marking their first issuance of 1.5 billion yuan

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A spokesperson from Haier emphasized how this step not only expands their financing avenues but also underscores the market's recognition of their creditworthiness and operational capability.

In addition to financial bonds, ABS has emerged as a favored financing method among consumer finance institutionsData from the Monetary Network illustrates that since the beginning of 2024, various entities, including Xinyi Consumer Finance and Central Plains Consumer Finance, have issued 14 rounds of ABS, collectively raising over 20 billion yuanNotably, Central Plains Consumer Finance has emerged as a leader in ABS issuance, with a total of approximately 6.468 billion yuan raised across 4 rounds.

A representative from Central Plains highlighted that their approach to combining various financing alternatives—such as inter-bank borrowing, ABS, and bond issuance—has effectively contributed to lowering their overall funding costs

Interest rates for ABS issuances have remained at historically low levels, consistently under 3%, enhancing the financial viability of such products.

Dong Ximiao, the chief researcher at Zhaolian, underscored the necessity for regulatory bodies to support the issuance of financial bonds and ABS by consumer finance firmsHe advocates for enhanced backing, such as offering capital supplement bonds to bolster the capital bases of these companies, thereby amplifying their overall lending capacity.

Addressing Non-Performing Assets

With these unprecedented financing scales come the challenges of managing non-performing assets

On December 26, Zhaolian announced multiple offerings of personal loan transfer projects, with significant outstanding principal amountsThe starting bids for each loan delivery reflect a market keen to absorb these assets.

Observations indicate a trend this December, where various consumer finance institutions have actively participated in the transfer of non-performing loans, reflecting a growing commitment to managing asset quality effectively across the sectorThis represents a significant increase in both the number of project listings and the discounts offered for asset sales compared to previous years.

Preliminary analysis up to September showed that 13 consumer finance firms have listed over 107 batches of personal loan non-performing asset packages for trading, amounting to over 22.8 million loans, with a total outstanding principal of 14.55 billion yuan, surpassing the figures from the previous year.

A representative from Zhaolian commented that engaging in the bulk transfer of bad loans is crucial for mitigating financial risks, allowing resources to be redistributed effectively within the financial system

Moreover, it aligns with regulatory measures that incorporated consumer finance companies into bad debt transfer pilot programs in 2022.

Yuan Yuan, Deputy General Manager at Zhongyou Consumer Finance, notes that this year's rapid increase in bad loans across the finance sector can largely be attributed to macroeconomic factors influencing consumer confidence and creditworthinessHeightened competition has also resulted in institutions relaxing credit standards, furthering the risk exposure among borrowers.

Dong Ximiao reiterated that pursuing bulk transfers effectively addresses financial risks and optimizes asset allocation, thus promoting a healthy financial ecosystem

He pointed out that the accelerating need for bad loan transfers stems from regulatory expansions and deteriorating credit profiles among borrowers amid economic downturns.

Enhancing Registered Capital

As consumer finance institutions bolster their risk management capabilities, they are also raising their capital management standards and entry thresholdsThis has triggered a wave of capital increases across the sector. Recently, Chengdu Bank announced plans to increase its registered capital to 1 billion yuan through a combination of capital reserves and investment from existing shareholders.

China CITIC Bank also recently disclosed significant capital adjustments, with plans to increase their registered capital to 1 billion yuan through new equity contributions from current stakeholders.

It was noted that various consumer finance companies including Nanyin and Haier Consumer Finance have successfully boosted their registered capitals this year, with significant sums allocated to enhance their operational capability and support strategic growth.

Recent data confirms that there are still seven consumer finance firms with registered capitals below 1 billion yuan, highlighting ongoing disparities in the sector.

Amplifying Polarization

As policies intensifying domestic demand and consumption take effect, coupled with increased regulatory scrutiny, the polarization within the consumer finance sector is becoming more pronounced.

Experts anticipate that the sector will see a significant disparity between leading firms and smaller institutions as the landscape becomes increasingly competitive

The ongoing adjustments in financing structures and operational strategies are essential for companies to remain viable.

Performance data from institutions suggests a growing trend of differentiation within the sectorRecent reports reveal that only a handful of companies maintain assets above 60 billion yuan, indicating a contraction in overall industry health.

Industry shifts appear to be challenging some firms, with companies like Sunshine Consumer Finance showing a significant drop in asset totals while simultaneously struggling with profitability issues.

As demand for financing grows, consumer finance firms must seize opportunities to expand responsibly while managing costs and risks through enhanced technological capabilities.

The trajectory of these institutions will largely depend on their ability to innovate strategically while catering effectively to the shifting demands of consumers.