Building a Conceptual Model of Factors affecting Personal Credit and Insolvency in China based on the Methodologies used in Western Economies

Building a Conceptual Model of Factors affecting Personal Credit and Insolvency in China based on the Methodologies used in Western Economies

Grzegorz Majewski (University of the West of Scotland, UK), Abel Usoro (University of the West of Scotland, UK) and Pattarin Chumnumpan (Bangkok University, Thailand)
DOI: 10.4018/978-1-4666-1637-0.ch012
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Abstract

Chinese economy is developing at an unprecedented pace. This expansion is prominent not only in the external aspect (increased export), but also internally in the increase in the demand for goods and services by common Chinese families. This demand cannot always be met by the monthly salary and therefore the need for personal credit. Because of the substantial risk involved in lending, there is need for robust and reliable credit evaluation procedures, strategies, policies, and systems. Lessons learned from the subprime mortgage crisis in U.S. are that lending can be a very risky activity that can lead to recession for a whole economy. Banks and other financial institutions in China are in need of appropriate procedures and systems should a barrier to further economic development be avoided. Besides, existing models and systems that are prevalent in the West may not fully match Chinese banking environment or the society itself. An appropriate personal credit rating methodology should take into account the differences between the Western and Chinese society and culture. There apparently does not exist such a methodology in literature that takes into consideration the unique Chinese situation. The aim of this chapter is to begin to fill this gap in knowledge by building a conceptual model of factors influencing demand for consumer credit and insolvency (bad debts) in China, based on the available methodologies used in the Western societies.
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Demand For Personal Credit In China

With the increased capitalization of housing and urbanization in China, personal assets have much increased but also has demand for personal credit risen (Smith, 2009). However, most of the borrowers have poor credit history including late payments, high debt levels, low incomes and inconsistent employment history, which lead to their low credit ratings. Though the lenders’ profits are rising, the lenders are taking increased risk in “overlending” to customers with unstable income and low ability to repay the loans (Whale, C. 2005).

Durvasula & Lysonski (2010) compared personal credit markets in China and the U.S.A. They noted that China is “undergoing an unprecedented metamorphosis as it evolves from a Communist society with government planning to one that is more market driven and consumer oriented” (Durvasala & Lyonski, 2010). This change in the economy has a profound effect in the psyche of Chinese consumers as well. Money, its possession and its pursuit has taken on a more important role. Almost 50 percent of Chinese think that money is either as important as or more important than friendship or ideas (Rosen, 2004). These changes were also noticed by the press (Fan, 2007). New extremely rich Chinese upper class with a high income can buy anything from expensive cars to posh apartments. Attitude to money of other Chinese who observe the rich is also changing. It may be observed that money has become an important topic in China; people are being encouraged to seek it, acquire it and flaunt it. Wang (2005) notes that in the modern China it is true that “you are what you consume – for those situated lower on the hierarchy, there is no faster way of acquiring social prestige than emulating the lifestyle of those higher up on the pecking order” (2005). Author noted the so-called “bobo” subculture – very rich individuals, who demand the best from life and look for luxurious products of finest taste and quality.

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