China's Booming Credit Economy and the Potential for US ARM

Mike Ginsberg

Increased regulation and government oversight from the alphabet soup of government agencies (FTC, FCC, and CFPB) on the U.S. accounts receivable management (ARM) industry has been nothing short of a malaise of late. The capital investments in compliance are enough to make your head spin, however, you decided that instead of looking for the exit doors you want to grow. Maybe you should consider going to China?

The development of China’s credit economy (and anything related to China for that matter) always appears in the news as of late and seems to be the focus of numerous businesses, politicians, and countries. Of course, this is no surprise, since China is the second largest economy in the world, it is one of the most populace countries in the world, and is developing advanced business service operations more rapidly than anyone would have predicted 10-20 years ago. Kaulkin Ginsberg has been watching developments in this region and thought it was time to share this update.

Rapid development of the economy required heavy investments in infrastructure and human capital by the government, which led to very large debt burdens. However, it wasn’t just the government that began embracing the idea of using debt to their advantage as consumers soon embraced the idea of a credit economy. The advent of a credit economy necessitated the creation of Asset Management Companies (AMC’s) to help the government manage and collect on the growing number of debts.

Despite its incredible growth, the credit economy is still a rather new development in China, and the historical presence of the state in both funding and running banking, construction and other sectors of the economy is not one that will continue indefinitely, nor is it an efficient long-term model. Signs already exist that the government will force industries to survive on their own, since as the economy grows, it is less possible for government to guarantee all operations and this is why the continuous development of AMC’s is so important.

US ARM’s are by far the most developed in the world today and have numerous tools that would help manage the intricacies of a still developing credit economy. The successful importation of US systems has been demonstrated time and time again throughout Europe, parts of Asia and in Central and South America. Like China’s AMC’s, US ARM’s offer numerous services such as debt purchases on non-performing loans to name just one, but have been forced to function in a competitive market place. This is something their Chinese counterparts have not encountered and better positions US ARM’s to compete in this environment. Though, picking up ones operation and moving to a new country without understanding the regulations may prove costly. Far more likely, is the development of strategic partnerships between agencies or individuals in the US and China.

Currently, nonperforming bank loans in China sit at approximately 1.04 percent of total loans. While just over 1 percent may sound really, really small, it is nearly 700 billion Yuan or slightly over $100 billion. What’s more, it has been growing steadily for the better part of a decade. The industry has been growing so well that the largest AMC in China, China Cinda, generated $1.6 billion in an IPO listing last year. With such a successful IPO listing, the Chinese government approved its second largest AMC; Huarong to prepare for IPO as well. Only, the expectation for Huarong is even greater than it was for China Cinda as they look to generate nearly $2 billion.

Experts agree China’s credit economy is poised for even greater growth into the foreseeable future as consumer debt continues its rise. Recent reports show consumer debt in China has been increasing steadily and grew 13.4 percent and 14.7 percent year over year in May and June respectively. The data isn’t yet available for July, but growth is expected to stay at the same levels as above. Additionally, the government forecasts the economy to continue growing and has already stated that its targeted investments will maintain growth well into the future, which is usually a good sign for consumers to spend more and manage even more debt

For these reasons and more, the opportunity for ARMs to expand operations into China may come earlier than expected. However, unease over regulations and engaging in business overseas may be too much of a risk for some and prevent them from pursuing partnerships and other opportunities.

It may even sound like we are suggesting leaders in the ARM industry conquer the modern day credit economy version of the Wild West (only in the east). That is hardly the case, since China’s credit economy will continue developing regardless of our presence. The difference being, our presence may accelerate development and serve as a major investment opportunity. Keep in mind; while the risk of investing resources in China sooner rather than later may be greater, and return on investment may take a bit longer, it could also lead to much greater rewards. You also want to ask yourself as you endure growing regulation as your new way of life; will you explore the growth potential of China?

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