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The move is no doubt part of a broader effort by the government to boost domestic consumption as an engine of delivering growth as outlined by the State Council in its policy “to maintain growth, adjust structure, promote reform and benefit livelihood".

The CBRC issued the Pilot Management Measures for a Consumer Finance Company (“Pilot Measures”) on July 22, 2009. The hope is that the establishment of consumer credit companies will promote domestic consumer demand and support sustainable economic development.

The PRC has (possibly luckily) missed out on the easy credit boom seen in much of the West (and also parts of Asia). The “consumer financial companies” outlined in the Pilot Measures refer to non-bank financial institutions established within the PRC and subject to CBRC approval. Crucially such companies are prohibited from taking deposits from the public. Such consumer credit companies are to provide small-amount loans according to the Article 2 of Pilot Measures. The consumer credit companies will offer personal loans for the purposes of travel, education and durables (i.e. electrical home appliances and IT products).

According to the Pilot Measures, the main shareholder in a consumer financial company must be a financial institution (can be domestic or overseas). Shareholders will also need to obtain CBRC approval and are subject to meeting certain conditions (i.e. overseas financial institutions must have had a representative office in China for more than two years or established a branch and have a sufficient analysis and research capability within China; the financial monitoring authority in their home country must have a good cooperative relationship in place with the CBRC in respect of administration and supervision). We understand that at present no foreign financial institution or foreign investor has been approved by the CBRC but the regulations do clearly allow for such possibility.

It is interesting to note that Bailian, one of China's largest retail conglomerates, is a shareholder in one of the recently established consumer credit companies.
 

Summary

Time will tell whether the growth of consumer credit in China will lead to a mountain of consumer debt as is the case of US and Korea or whether Chinese consumers will continue to pay off their bills on time much to the chagrin of their financiers. In any event the new developments are a further indication of China seeking to use domestic demand as an engine of growth rather than relying solely on exports. Foreign retailers and financial institutions are likely to closely monitor the opportunities that arise for them as credit becomes a more common part of consumer life.

Perhaps the myriad of laws and regulators are part of the problem and not part of a solution. The existing PRC laws can cover the main points but it seems that problems remain due to a failure to enforce the regulations and not due to a failure to have enough of them. In addition there are so many authorities involved (Administration for Industry and Commerce, the Food and Drug Administration, the Administration of Quality Supervision, Inspection and Quarantine, the Standardization Administration, the Ministry of Health, the Ministry of Agriculture, the Ministry of Commerce, etc.) it may be difficult to determine the correct authority to be addressed in case of a problem and there are also co-ordination issues. Also it seems that local authorities have not fully enforced the regulations. As is often the case only the central authorities appear to be willing to take effective action.

Another problem appears to be that a number of large dairy companies were given inspection-free status by the General Administration of Quality Supervision, Inspection and Quarantine (China's product quality watchdog). As we have seen in Wall Street self-regulation or de-regulation is not always the right answer.

What's Next from a Legal Perspective

The PRC central authorities are now moving quickly to take action and calm consumers concerns including:

Cancelling Exemptions from the Inspection System – as mentioned above a major problem was a system of “trusted” companies being largely unsupervised. This system was cancelled on September 18, 2008 by the State General Administration for Quality Supervision, Inspection and Quarantine. On the same day, the State Council declared that the System of Exemption from Inspection for food quality was cancelled.

Draft PRC Food Safety Law - The government currently has a draft PRC Food Safety Law being circulated since April 20, 2008. This law will replace the PRC Food Hygiene Law, which is no longer considered suitable for today's China. The Draft law is an umbrella law which aims to establish a comprehensive supervision system for food safety and resolve turf fights between supervision authorities. It is expected that the Draft or its implementing regulations will be strengthened further in light of the dairy industry problems. One area of controversy is whether the food safety administration should still be done by a number of authorities (current method) or be done by one authority is still full of controversy.

Administrative Responsibility System – Up to now, 7 senior officials have been dismissed or have resigned due to the milk incident, including the Head of the State General Administration for Quality Supervision, Inspection and Quarantine (Mr. Li Changjiang) and the Mayor of Shijiazhuang (Ji Chuntang) resigning, the CCP Secretary of Shijiazhuang (Wu Xianguo) being dismissed, etc. Accordingly the government is taking responsibility. This distressing incident may be a spur to better and more effective regulation. Hopefully other governments facing different types of regulatory problems will also take specific action.