In Depth: Consumers, Entrepreneurs Give Banks’ Retail Lending a Much-Needed Boost

Despite the challenges of market saturation in the credit card sector and a downturn in the property market, Chinese banks have managed to increase their overall retail loans by focusing on other forms of consumer lending and loans to individual entrepreneurs [para. 1]. The number of credit and dual credit-debit cards in China decreased by 3.9% year-on-year to 767 million in 2023, down from the peak of 807 million in 2022, according to the People’s Bank of China (PBOC) [para. 2]. Conversely, the country’s outstanding personal mortgages fell by 1.9% year-on-year by the end of March 2023, marking the fourth consecutive quarterly decline [para. 4].

Despite these declines, overall outstanding retail loans grew by 5.1% year-on-year by the end of March. Consumer loans excluding mortgages increased by 8.7%, while personal business loans surged by 15.4% [para. 5]. Peng Jiawen of China Merchants Bank (CMB) noted that credit card loans and housing mortgages had historically experienced rapid growth and were priced with relatively high interest rates. However, growth in these areas slowed last year, leading to a decline in their contribution to CMB’s total loans [para. 7].

Banks have shifted their focus to non-mortgage consumer loans, which target creditworthy consumers, as a way to offset slowing credit card and mortgage businesses. Despite this, industry insiders acknowledge limitations on growth given the focus on higher-quality borrowers [para. 8]. Growth in personal business loans could ease long-standing financing difficulties faced by individual entrepreneurs and small business owners but is hampered by a lack of credit information [para. 9].

Several factors contribute to the shrinking mortgage sector, including the overall property market downturn and increasing early repayments by homeowners. China’s efforts to stimulate housing demand through repeated cuts to its mortgage reference rate have led homeowners to repay loans early to reduce borrowing costs. For instance, the mortgage reference rate was cut to 3.95% in February [para. 11][para. 13]. Li Yun of China Construction Bank Corp. (CCB) observed a decrease in early repayments after the government instructed banks to reduce interest rates on existing first-home mortgages in August, aiming to slow early repayments [para. 14].

The credit card business also faced declines, with Ping An Bank reporting an 11.2% year-on-year drop in outstanding credit card loans to 514 billion yuan ($72.6 billion) by the end of last year. Industrial Bank Co. Ltd. and China Everbright Bank Co. Ltd. saw decreases of 11.3% and 6.5%, respectively [para. 17].

To compensate for the decline in mortgage income, major Chinese banks recorded double-digit growth in both non-mortgage consumer loans and personal business loans last year [para. 18]. Non-mortgage consumer loans offer higher returns than mortgages and are deemed better-quality assets compared to credit card loans, according to CMB’s Zhu Jiangtao [para. 21]. These loans are also encouraged by government policies to stimulate consumer spending, leading to a competitive environment among banks to attract customers with low interest rates [para. 23].

Non-mortgage consumer loans, however, cannot fully replace mortgages due to their inherent advantages, such as being secured by collateral and carrying high interest rates with safety [para. 28]. By the end of March, mortgages constituted 47% of the total 81.5 trillion yuan in outstanding retail loans [para. 29]. Banks are advised to integrate services from different segments to boost growth in retail lending. For example, several banks, including Chengdu Rural Commercial Bank Co. Ltd., have merged their credit card departments with retail lending departments to create synergies [para. 32][para. 34].