The Chinese Economy

ISSN: 1097-1475 (Print) 1558-0954 (Online) Journal homepage: http://www.tandfonline.com/loi/mces20

Consumer Credits and Economic Growth in China

Ning Ding

To cite this article: Ning Ding (2015) Consumer Credits and Economic Growth in China, The
Chinese Economy, 48:4, 269-278

To link to this article: http://dx.doi.org/10.1080/10971475.2015.1044849

Published online: 30 Jul 2015.

Submit your article to this journal

Article views: 69

View related articles

View Crossmark data

Full Terms & Conditions of access and use can be found at

http://www.tandfonline.com/action/journalInformation?journalCode=mces20

Download by: [97.74.237.196] Date: 18 March 2016, At: 16:59

 The Chinese Economy, 48: 269–278, 2015
Copyright # Taylor & Francis Group, LLC
ISSN: 1097-1475 print/1558-0954 online
DOI: 10.1080/10971475.2015.1044849

Consumer Credits and Economic Growth in China

Ning Ding
School of Finance, Dongbei University of Finance and Economics,
Dalian, Liaoning Province, China

Consumption played a relatively less important role historically in China’s economic growth, which
has been primarily driven by exports. As the Chinese government tries to stimulate domestic
Downloaded by [97.74.237.196] at 16:59 18 March 2016

demand for economic growth outlined in the Third Plenary Session of the Eighteenth Communist
Party of China (CPC) Central Committee, consumer credits have become increasingly important as
China’s export-led growth slows down. This article describes the status of consumer credit and
presents an empirical analysis of the relationship between consumer credit and economic growth.

Keywords: consumer credit, domestic demand, economic growth, financial institutions

After the 2008 financial crisis, the export-oriented model that drives China’s economic growth
needed to be reconsidered. The Chinese government has developed a long-term mechanism to
stimulate domestic demand by diversifying the focus from exports and investments to domestic
consumption in order to improve economic growth after the crisis. Thus, consumer credit would
be expected to play an increasingly important role in China’s future economic growth. A good
Chinese credit system would be expected to help stimulate domestic demands and improve the
asset structures of commercial banks as it makes more funds available on time to consumers.
According to the Asian Blue Book 2010, published by Morgan Stanley, the proportion of
consumer credit to total consumption in China will amount to 40 percent until 2020, and the
capacity of consumption will increase by 30 percent.1 Official statistics of the People’s Bank
of China (PBC) show that the ratio of individual consumer credit to total credit went up from
15.5 percent in 2010 to 16.2 percent in 2011.2 Total national consumer credit amounts to
RMB10.27 trillion (USD1.66 trillions), which accounts for 16.42 percent of that in 2012.
The ratio of consumption index to GDP in China is still relatively low. Three main reasons
that have caused lagging development of consumer credit in China should be noted. First, during
the past 30 years, Chinese economic reforms substantially relied on exports to promote economic
growth. According to the National Statistic Bureau, the total foreign trade volume increased from
US$20.6 billion in 1978 to US$2.17 trillion in 2007 (before the 2008 financial crisis).3 It has
increased 104 times. The total volume of exports increased by a factor of 124—to US$1.2 trillion
from US$9.8 billion during the same period. Had the 2008 financial crisis not occurred, Chinese
exports, no doubt, would have continued to climb, and the Chinese government would have

Correspondence should be sent to Ning Ding, Dongbei University of Finance and Economics, School of Finance,
No. 217-99-2-2-2 Jian Shan Street, Sha he Kou District, Dalian, Liaoning Province, PR China 116025. E-mail:
dingning610@hotmail.com
Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/mces.
 270 NING DING

provided more funds to support financial institutions to stimulate the foreign trade. In this case,
the government would not focus on consumer credit, and the development of consumer credit
would be slowed more.
Second, as China transitions from a central-planning economy to a market-oriented economy,
several problems have been encountered. Initially, the big four Chinese banks (the Bank of
China, the China’s Construction Bank, the Industrial and Commercial Bank of China, and the
Agricultural Bank of China) dominant above 80 percent of the market shares in the credit market.
The oligopolistic structure in the financial sector provides no incentive for these banks to explore
new businesses in new areas, such as consumer credit. After China became a member of World
Trade Organization (WTO) in 2001, the Chinese financial market should have opened fully to the
outside world by 2006, according to the WTO agreement. This relaxation should have prompted
the Chinese financial institutions to recognize the real competition from both outside and
inside of China. At present, there are only 16 publicly traded commercial banks. More financial
Downloaded by [97.74.237.196] at 16:59 18 March 2016

institutions are expected; joint stock banks, urban banks, and urban and rural credit unions will
increasingly participate in the competition. Financial institutions have been trying hard to
develop new businesses, including consumer credit, to better compete. The use of credit cards
as a major source of consumer credit has developed rapidly. According to China’s Credit Card
Report in 2011, total credit card consumption amounted to US$661 billion, which accounts for
22.6 percent of the total retail consumption in China.4 Although consumer credit is becoming
more popular, financial institutions still face many barriers to stimulate consumer credit because
of a high default risk. Furthermore, a credible individual credit rating system has not been
completely set up yet.
Third, consumers follow their traditional savings habit of many years, of using cash, which
explains the slow use of consumer credit in the financial markets. More recently, there is
concern among the Chinese people about future retirement because the social security system
has not been properly implemented yet. Understandably, they have to save money as much
as they can, slowing the use of consumer credit. In addition, the Gini coefficient was kept at
the comparatively high level of 0.49 during the period from 2003 to 2012 in China.5 This means
that the income gap between the rich and the poor is large. Eighty percent of consumer credit
is utilized in the hands of the rich while the remaining 20 percent is left for the poor who prefer
to save.
In sum, consumer credit is relatively less developed in China as compared to developed coun-
tries. However, over time, savings habits will be changed, and the younger Chinese generation
tends to use more consumer credit for various reasons. Consumer credit appears to have a prom-
ising future and also may bring a new look to and influence on China’s economic growth.
This article is divided into five sections as follows. The next section is a literature review. In
the third section, we present a description of consumer credit as a whole. Section four contains
an empirical analysis of the relationship between consumer credit and economic growth. The
article ends with a discussion of policy suggestions.

LITERATURE REVIEW

Prior studies on the relationship between consumer credit and economic growth mainly focus on
how consumer credit can release credit constraints of consumers and how these measures would
 CONSUMER CREDITS AND ECONOMIC GROWTH IN CHINA 271

affect consumption growth. A few studies directly link consumer credit and economic growth.
Cochrane (1991) considers consumer credit as a function of consumption insurance. Consumers
could borrow money from formal institutions (such as charities and private insurances) and infor-
mal individuals (such as relatives and friends) to protect their income or wealth against
occasional shocks. Zeldes (1989) and Ludvigson (1999) find that there is a positive relationship
between expected consumer credit growth and consumption expenditure growth. Zeldes (1989)
shows that liquidity constraints play a key role in consumer behaviors. When consumers can
borrow money without constraints, expected consumer credit will increase consumption and vice
versa. Ludvigson (1999) sets up a model to illustrate the relationship between liquidity con-
straints and household income. Loosening the regulations on consumer credit can bring growth
to both income and consumption demands. Bishop (2003) does an empirical study on consumer
credit in the United States and found that it contributed much to the economic growth during the
1990s with the average consumption annual growth rate of 3.8 percent and ten-year accumulative
Downloaded by [97.74.237.196] at 16:59 18 March 2016

growth rate of 34.5 percent. However, the disposable income per capita grew at a very low level,
suggesting that the consumption growth from consumer credit, and not income growth, is the
driving force for economic growth.
In China, scholars analyze consumer credit mostly from a theoretical perspective. Wang
(2000) argues that it is necessary to develop consumer credit in the economic transitional period
because it can improve total demands and improve economic growth. Cai and Xu (2005) test the
relationships between consumer credit, saving rates, and small-to-medium-sized loans. Shen and
Qi (2007) theoretically confirm the positive effects of consumer credit on economic growth.
Zhou and Liu (2008) examine consumer credits and regional economic growth differences using
the data of Hunan Province; they find big differences in consumer credits among the different
regions of China. Fung et al. (2010) discusses the development of the Chinese real estate market,
which provides some evidence about the mortgage situation in China. Ding and Li (2012) try to
set up a dynamic relationship between consumer credit and economic growth. Although many
scholars directly or indirectly relate consumer credit to economic growth, they have not
explicitly shown this relationship. A limited number of studies have evaluated how consumer
credit affects economic growth. Thus, this article fills this gap and examines how consumer
credit affects economic growth. To this end, we use an impulse response function from a vector
autoregressive model with data from 2001 to 2012.

HISTORICAL BACKGROUND OF CONSUMER CREDITS IN CHINA

Consumer credit started in the 1950s in China. Since 1978, when China opened its doors to the
outside world, consumer credit has been used for individual mortgages. Since 1998, when the
Individual Housing Loan Management Principles was implemented by PBC, consumer credit
has been improved. In 1999, the Chinese Central Bank enforced Guidelines of Individual
Consumer Credits, which specifies that commercial banks can operate consumer credit busi-
nesses to develop new consumer credit products and to enlarge the service areas of consumer
credit. Consumer credit can be divided into three categories: mortgages, auto credits, and credit
cards and miscellaneous other credit.
Table 1 shows the main categories of consumer credit in 2012. Mortgages account for 79.6
percent, which is an important component of consumer credit, while auto credit is less than 5
 272 NING DING

TABLE 1
Composition of Consumer Credit in China in 2012

NO. Composition Proportion (%)

1 Mortgages 79.6
2 Auto credits 4.23
3 Credit cards and others 16.17

Sources: www.pbc.gov.cn.

percent, even though the total sale volume of autos amounts to US$2.67 million that year.
This fact indicates that 95 percent or more of consumers select to buy a car without borrowing
money from financial institutions. That means that auto consumption growth is faster than the
growth of consumer credit because of the traditional consumption habits in China. Credit cards
Downloaded by [97.74.237.196] at 16:59 18 March 2016

and other account for 16 percent, which suggests that increasingly more people use credit cards
over time as a consumption tools.
In general, consumer credit is effective in promoting consumption, which leads to economic
growth in three major aspects. First, consumer credit can stimulate the entire national economy.
The ratio of consumer credit to GDP increased substantially from 2001 to 2012, reflecting
the policy-oriented adjustment from exports and investments to domestic consumption. This
ratio continues to rise. During 2005–2008, a period that covered the financial crisis and
after 2009, the consumer credit ratio increased rapidly, which amounted to 19.78 percent in
2012 (see Figure 1). The left scale in Figure 1 shows the level of GDP, and the right scale
shows the ratio of consumer credit to GDP. The results of increasing consumer credit use
indicate that both government and financial institutions play a critical role in promoting
consumer credit.
Second, the status of consumer credit improved much among all credit sources in
financial institutions. Figure 2 shows that the ratio of consumer credit to total credit went up
quickly, from 6.22 percent in 2001 to 16.42 percent in 2012. It is apparent that the financial
institutions have stimulated and promoted the use of consumer credit, leading to its rapid
growth.
Finally, Chinese consumers gradually realized that consumer credit can be a useful, individ-
ual financing tool in their daily lives. Figure 3 shows that the ratio of consumer credit to total
savings increases sharply, from 9.48 percent in 2001 to 26.73 percent in 2012, which is the

FIGURE 1 Ratio of Consumer Credits to GDP in 2001–2012. Sources: National Statistic Bureau in China.
 CONSUMER CREDITS AND ECONOMIC GROWTH IN CHINA 273

FIGURE 2 Ratios of Consumer Credit to Total Credits in 2001–2012. Sources: National Statistic Bureau in China.
Downloaded by [97.74.237.196] at 16:59 18 March 2016

FIGURE 3 Ratios of Consumer Credit to Total Savings in 2001–2012. Sources: National Statistic Bureau in China.

largest increase shown. However, the ratio is still below 30 percent, which is low compared to
developed countries such as the United States. This situation is likely because of the traditional
credit culture of the Chinese, which promotes savings.
In sum, consumer credit has been growing and becoming increasingly important in the
Chinese national economy. We now examine more closely how consumer credit affects the
GDP in China.

EMPIRICAL ANALYSES

Data Selection

As mentioned, consumer credit can increase the growth of consumption, which, in turn, improves
economic growth. This article estimates the relationship between consumer credit, consumption,
and economic growth using a multiple regression analysis. We use the quarterly time series
cross-section data for the period covering 2001 to 2012. The data come from the People’s Bank
of China (PBC) and the National Statistics Bureau. In this study, we use three variables to
analyze these relationships. BCD represents the balance of consumer credit (i.e., net consumer
credit) to proxy the amount of credit available to consumers in China. FC is final consumption.
GDP denotes the gross domestic product.
 274 NING DING

Unit Root Test

First, we conduct a batch of unit root tests to examine the stability of the time series. We use the
ADF test (the Augmented Dickey-Fuller test) on the logarithmic series of GDP, BCD, and FC,
which can be expressed, respectively, by LNGDP, LNBCD, and LNFC. Table 2 below shows
the unit root test results.
Table 2 shows that LNGDP, LNBCD, LNFC at their level have unit roots, implying that they
are not a stable time series. The first order difference of the time series, DLNGDP, D LNBCD,
and DLNFC appears also to be nonstationary. Finally, the results for the second order difference
of these variables, D2LNGDP, D2LNBCD, and D2LNFC, are stationary at the conventional
level of statistical significance.
Generally speaking, there are five common rules that can be used for the selection criteria for
the optimal lag order. They are the sequential modified LR test statistics (LR), with each test at
Downloaded by [97.74.237.196] at 16:59 18 March 2016

5 percent level; the Final Prediction Error (FPE); the Akaike Information Criterion (AIC); the
Schwarz Information Criterion (SC); and the Hannan-Quinn Information Criterion (HQ). In the
following analysis of the vector autoregressive model, we use the optimal lag order, which is
determined by the criteria (see Table 3). The optimal lag length is found to be 2 quarters.

Variance Decomposition

Table 4 reports the results of the variance decomposition from the VAR analysis, which analyzes
the contributions of each shock on other variables. This table reports how a shock of GDP affects
itself, consumption, and consumer credit. The GDP is affected most by itself. However, the effect
decreases over time with a floor value of 80 percent. The impact of a GDP shock on both
consumer credit (LNBCD) and consumption (LNFC) becomes larger over time and amounts to
4.47 percent of consumer credit and 15.25 percent of consumption after 20 quarters. The results
are consistent with the macroeconomic conditions in China. That is to say, the proportion of
consumer credit to GDP is quite small, and the direct effect on consumer credit from GDP is
marginal. However, consumption is greatly affected by GDP, a reasonable result that is expected.

TABLE 2
ADF Test Results on LNGDP, LNBCD and LNFC as Well as Their Difference

ADF P Value 1% sig. 5% sig. Parameter Results

LNGDP 2.0768 0.5436 3.5181 4.1865 (c,t,4) non stable

DLNGDP 2.1367 0.2319 3.5924 2.9314 (c,0,3) non
D2LNGDP 11.3636 0.0000 3.5924 2.9314 (c,0,2) stable
LNBCD 2.2556 0.4487 4.1705 3.5107 (c,t,1) non
DLNBCD 3.4151 0.0618 4.1705 3.5107 (c,t,0) non
D2LNBCD 7.6887 0.0000 3.5847 2.9281 (c,0,0) stable
LNFC 1.7375 0.7182 4.1705 3.5107 (c,t,1) non
DLNFC 2.0672 0.5498 4.1705 3.5107 (c,t,0) non
D2LNFC 6.6796 0.0000 3.5847 2.9281 (c,0,0) stable

Notes: c represents a constant term, t is the trend term, and the third one is the lag length. When c and t are zero, the
test does not include a constant term and trend term. P value is for the ADF test.
 CONSUMER CREDITS AND ECONOMIC GROWTH IN CHINA 275

TABLE 3
Selection of Lag Length for the Vector Autoregressive Model (VAR)

Lag Log L LR FPE AIC SC HQ

0 37.6073 NA 4.46e-05 1.5047 1.3854 1.4600

1 420.9879 700.0863 3.81e-12 17.7821 17.3050 17.6034
2 440.3030 32.7517* 2.44e-12* 18.2306* 17.3958* 17.9178*

Notes: *represents the minimum value of each rules.

Table 5 reports the shock of consumer credits on GDP and consumption. The results indicate
that consumer credit increasingly influences LNGDP. At the twentieth quarter, consumer credit
explains the LNGDP variation to the tune of 58.24 percent. It explains a consumption variation of
24.59 percent. This result is shocking because over 50 percent of GDP changes can be explained
Downloaded by [97.74.237.196] at 16:59 18 March 2016

by consumer credit. However, consumer credit does not explain itself well, only 17.18 percent
over time. These results indicate that it is critically important to develop consumer credit for
China’s economic growth. Consumer credit is an important tool to improve further the
development of the Chinese economy that Chinese policymakers cannot ignore.

Policy Implications

In light of the importance of consumer credit on economic growth, exploring ways to stimulate
the use of consumer credit in China is important. Several approaches can be used to increase the

TABLE 4
The Effect of a Shock in LNGDP to Three Variables

Period LNBCD LNFC LNGDP

1 0.0000 0.0000 100.0000

2 1.0117 0.6538 98.3345
3 1.3272 3.2939 95.3788
4 1.2325 5.5670 93.2005
5 1.3326 6.7658 91.9016
6 1.6024 7.7520 90.6457
7 1.8256 8.6494 89.5250
8 2.0077 9.3718 88.6205
9 2.2005 9.9819 87.8176
10 2.4052 10.5467 87.0480
11 2.6112 11.0786 86.3102
12 2.8181 11.5821 85.5998
13 3.0275 12.0679 84.9046
14 3.2380 12.5430 84.2190
15 3.4485 13.0095 83.5420
16 3.6584 13.4690 82.8727
17 3.8668 13.9224 82.2108
18 4.0727 14.3702 81.5570
19 4.2753 14.8120 80.9126
20 4.4737 15.2472 80.2791
 276 NING DING

TABLE 5
The Effect of a Shock in LNBCD to the Variables

Period LNBCD LNFC LNGDP

1 52.2531 39.6124 8.1344

2 48.8536 43.6518 7.4946
3 46.4061 45.6760 7.9179
4 43.0361 45.4953 11.4687
5 38.8623 43.7616 17.3761
6 35.0570 41.4323 23.5106
7 31.8450 38.8916 29.2634
8 29.0259 36.3135 34.6606
9 26.5439 33.8899 39.5662
10 24.4201 31.7392 43.8407
11 22.6448 29.8967 47.4586
Downloaded by [97.74.237.196] at 16:59 18 March 2016

12 21.1877 28.3636 50.4487

13 20.0171 27.1284 52.8546
14 19.1007 26.1695 54.7297
15 18.4063 25.4601 56.1336
16 17.9026 24.9710 57.1264
17 17.5591 24.6722 57.7687
18 17.3451 24.5317 58.1232
19 17.2284 24.5154 58.2562
20 17.1754 24.5860 58.2387

use of consumer credit. First, the Chinese government should play a positive role in the devel-
opment of consumer credit. With a large reduction in exports and investments since the 2008
financial crisis, the Chinese central government has changed the investment strategy by
stimulating more domestic consumption to push domestic demand to improve GDP growth.
The Chinese government should take some measures to encourage consumers to use more
consumer credit in their daily lives, such as incorporation of the social security system and
the health insurance system with the credit system. Most Chinese consumers prefer to save
money instead of spending. They desire to save more money for their future pensions, health
expenses, and educational funds for their children. If the government can provide more guaran-
tees for the consumer’s future, the consumer will spend more. Chinese consumers will be more
likely to regard consumer credit as one of their common financial tools.
Second, the commercial banks should improve the individual credit rating system, develop
new financial products, and simplify procedures for getting consumer credit. On the one hand,
many default risks occur in the area of consumer credit because a sound individual credit rating
system has not been set up yet. This failure directly results in the hesitation of such businesses.
If there are good individual credit rating systems in the banking industry as a whole, credit risks
will be better controlled and consumer credit will be further promoted. On the other hand,
commercial banks should develop new consumer credit products, which are not limited to
mortgages, auto loans, and credit cards; this development will attract more consumer attention.
Complicated procedures for consumer credit should be simplified so that commercial banks can
provide good services in an easier way.
Finally, the older generation of Chinese consumers grew up during tough political and
economic times. Most of these individuals take frugality as a cherished part of their traditions,
 CONSUMER CREDITS AND ECONOMIC GROWTH IN CHINA 277

which results in the so-called good habit of savings. Tradition also explains why the savings rate
in China has remained as high as over 40 percent for many years, even if the deposit rate is
artificially low. It will take time for this group of consumers to change. On the other hand,
younger consumers represent a new source of consumer credit. They are very much Westernized
and open to new products. They pursue individualism and often use the internet to follow global
trends. Although many in this group do not yet earn an income, they do significantly influence
their parents’ decisions in food, clothing, electronics, and other purchases. They are a driving
force behind current consumer credit, and they are the potential power of consumer credit in
the near future. Thus, we are quite optimistic that consumer credit has a promising future in
China.
Downloaded by [97.74.237.196] at 16:59 18 March 2016

CONCLUSIONS

In this study, we argue that the late development of consumer credit primarily results from
structural impediment of China’s financial market. Banks were not motived to develop new
instruments to stimulate economic growth because of the monopolistic nature of China’s
bank-based economy. Only after China joined the World Trade Organization and became a
global member, did Chinese banks start to use the market incentive to develop consumer credit.
A push from the government also helped to develop the financial market.
We use the vector autoregressive model to analyze the relationships between consumer credits,
consumption, and economic growth from 2001 to 2012. The results indicate that consumer credit
and economic growth are closely linked. Thus, consumer credit can influence economic growth to
some extent, and at the same time, economic growth can also impact on consumer credit.
We also suggest several viable approaches that can be used to promote consumer credit,
which further stimulate economic growth. Future research efforts should analyze closely the
specific channels that consumer credit needs and how financial institutions or banks can
develop instruments to satisfy these needs.

NOTES

1. See the Asian Blue Book (2010), published by Morgan Stanley.

2. See the information at the website of the People’s Bank of China, www.pbc.gov.cn.
3. See the Yearbook of the National Statistics Bureau.
4. See China Credit Card Report in 2011.
5. The National Statistics Bureau provides more information about its publication.

REFERENCES

Bishop, M. (2003). Credit. Spending and its implications for recent US economic growth. Working paper. Mary
Washington College.
Cochrane, J. H. (1991). A simple test of consumption insurance. Journal of Political Economy, 99(5), 957–976.
Cai, H., & Z. Xu. (2005). Consumer credits, credit allocation and Chinese economies. Journal of Financial Research, 9,
63–65.
 278 NING DING

Ding, H., & S. L. Li. (2012). Dynamic analyses on the relationship between consumer credits and economic growth.
Business Times, 2, 41–42.
Fung, H., J. L. Jeng, et al. (2010). Development of China’s real estate market. The Chinese Economy, 43(1), 71–93.
Shen, J., & X. S. Qi. (2007). Research on the consumer credits impacts on economic growth. Guangxi Rural Financial
Research Journal, 1, 34–38.
Wang, M. (2000). Some thoughts on the development of consumer credits in China. Finance and Trade Economics, 4,
23–28.
Zhou, H., & Y. Liu. (2008). Consumer credits and regional economic growth differences: Based on the empirical
studies of Hunan Province in China. The Probe, 12, 41–43.
Zeldes, S. P. (1989). Consumption and liquidity constraints: An empirical investigation. Journal of Political Economy,
97(2), 305–346.
Downloaded by [97.74.237.196] at 16:59 18 March 2016