The Dilemma of Consumer Loans

The Dilemma of Consumer LoansSince early 2025, gold prices have been hitting new highs, creating a wealth frenzy that has drawn many investors. Some have even turned to consumer loans—attempting to “borrow money to invest in gold” and leverage for higher returns. However, this seemingly clever strategy hides significant risks: while gold is considered a safe-haven asset, using leverage to bet on short-term fluctuations turns a stable investment into a high-risk gamble. This trend, driven by new consumer loan policies, is raising concerns.On March 21, the National Financial Regulatory Administration (NFRA) of China issued a notice titled “Notice on Developing Consumer Finance to Boost Consumption.” The policy raised the personal consumption loan limit from 300,000 yuan to 500,000 yuan and increased internet consumption loans from 200,000 yuan to 300,000 yuan. Additionally, repayment terms were extended from 5 to 7 years, and banks were given the flexibility to adjust interest rates. The goal was to stimulate big-ticket consumer spending and drive economic growth. However, after the policy’s implementation, several commercial banks quickly reduced interest rates to between 2.5% and 2.8%. With these low-interest temptations, the boundaries of “consumption” became increasingly blurred, triggering a complex narrative around arbitrage, risk, and policy dynamics.After the interest rates for consumer loans dropped to the “2%” range, they created a significant inversion with mortgage rates. Despite regulatory bans on using consumer loans for real estate purchases, investments, or business purposes, banks face technical challenges in tracking the actual use of the funds.

This has led some borrowers to use the money for debt refinancing or even investing. For instance, refinancing a mortgage with a 2.5% consumer loan could save approximately 100,000 yuan in interest on a 1 million yuan loan over 7 years, assuming the original mortgage rate is around 4%.Such “gray area” operations thrive partly because banks focus more on the borrower’s repayment ability than on the flow of funds. Industry insiders reveal that in this round of low-interest consumer loans, high-quality clients such as civil servants and state-owned enterprise employees have become the main borrowers, while those with lower credit ratings but stronger actual needs have been excluded. This structural contradiction highlights the real limitations of consumer loans under the guise of “financial inclusion.”The downward pressure on interest rates also reflects the growing net interest margin (NIM) pressure on the banking industry. NIM, the difference between a bank’s interest income from loans and the interest it pays on deposits, has become a critical measure of profitability. According to data from the NFRA, China’s commercial banks had a NIM of 1.52% at the end of 2024, down 17 basis points from the previous year, far below the 1.8% warning line. On one hand, deposit rates are slow to adjust downward in response to falling loan rates; on the other, weak economic conditions have led to sluggish credit demand, further squeezing NIM.To ease this pressure, this year’s two sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference proposed issuing 500 billion yuan in special treasury bonds to help large state-owned commercial banks replenish capital and enhance their ability to withstand risks and increase lending.

On March 30, major Chinese banks such as Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank announced plans to issue A-shares to specific investors to raise a combined total of no more than 520 billion yuan. The Ministry of Finance will subscribe to all of Bank of China and China Construction Bank’s newly issued shares in cash, and take up more than 90% of the new shares issued by Bank of Communications and Postal Savings Bank, totaling a capital injection of 500 billion yuan. This capital increase means that the big state-owned banks will collectively expand their balance sheets by about 7 trillion yuan—equivalent to a “flood” of liquidity. Some analysts suggest that this could have a similar effect to a reserve requirement ratio (RRR) cut and that it might stabilize the stock market indices amid market uncertainty.However, some analysts caution that this “indirect liquidity injection” may boost lending capacity in the short term, but it does not resolve the underlying issue. If the return on real economy investments remains low and household income growth is sluggish, funds may get stuck in the financial system, leading to inefficient circulation and insufficient flows into consumption and investment. “Borrowing money to invest in gold” is one example of this.On March 31, as global trade tensions heightened following Trump’s tariff remarks, the Asia-Pacific stock markets collectively fell. Meanwhile, spot gold, after breaking through the $3100 mark per ounce, rose to $3120, setting another record high.

It’s unclear how much of this surge is driven by credit funds, including consumer loans. However, the “frenzy” of declining consumer loan rates has already raised regulatory concerns. Recently, several banks’ head offices sent internal notifications to their branches, informing them that starting in April, the annualized interest rate on credit consumer loan products should be no less than 3%. The ultra-low interest products may be halted, which is both a self-help measure to prevent further narrowing of NIM and a correction of the financial market’s arbitrage activities.While regulating consumer loans, a deeper challenge lies in balancing policy objectives. Economist Ma Guangyuan points out that the excessively low consumer loan rates reflect the overall high interest rates in China, especially in the housing loan sector. Private equity fund manager Chen Tonghui notes that Chinese banks have historically had a “quasi-fiscal” nature. The 500 billion yuan capital injection is also a demonstration of the government’s determination to stimulate economic development this year. The key issue lies in how to implement “broad credit” once “loose monetary” policies have been adopted. In this regard, related policies targeting the “equity” portion for residents and enterprises, such as income distribution reforms and improvements in social security, must be implemented. These are undoubtedly complex and long-term processes.The clash between the new consumer loan policies and the gold boom reveals the complexity of the financial market ecosystem: low-interest funds can both activate consumption potential and potentially lead to irrational leveraging. In this “dilemma” of consumer loans, the battle is far from over.