Borrowers can be choosers

Provident Financial is never going to win a popularity contest. It is the company that launched a credit card last year with an interest rate of up to 70% under the slogan "stay in control of your budgeting," a task rather easier for the chief executive, who took home £583,000. Now the Competition Commission is on the warpath. The issue is not the Vanquis card but home credit, which is more serious for Provident. It is about 55% of a market the commission thinks is a cosy backwater where the lenders rip off some of the poorest members of society to the tune of £100m a year. That is a big allegation.

So did Provident's share price plunge? Well, no it didn't: 2.4% on a weak day in the stock market is merely noise. Investors, by and large, are paid to make financial, not moral, judgments and here they are betting that the commission will not make much difference.

That view looks correct. Most of Provident's customers, contrary to popular belief, do not live on the bread line. About 85% have bank accounts and 20% own their homes. Most (and, of course, there will be exceptions) have a choice of where to borrow. The reason they choose to borrow £100 and repay £165 via £3-a-week instalments is that, unlike a credit card or bank overdraft, there are no penalties for late payment. Sure, 65% annual interest sounds obscene but some value must attach to knowing with certainty the size of the final bill.

Is lack of mainstream competition inflating that value? In other words, are rates artificially high? It's hard to say so definitively. Provident may be dominant in pure home credit but its share of all loans under £1,000 is 7%-8%, which is not a position from which to dictate prices. The progress of the group's share price - it's where it was five years ago - suggests Provident is not making it up when it says conventional banks have moved on to its patch.

Some of the commission's remedies look sensible, such as obliging the home credit industry to share its data with credit-scoring companies. That ought to encourage much greater competition from mainstream banks.

But the idea of reducing restrictions on canvassing customers sounds dangerous. Loan sharks lurk beneath this area of lending and anything that gave them any encouragement would be dumb.

It is why the benefit of regulatory meddling in this sensitive area is far from straightforward. The borrowers are not in mass revolt and some of the alternative lenders around are very ugly characters.

Look west, not east

It's the shape of things to come. The People's Bank of China raises interest rates marginally from 5.58% to 5.85% and financial markets have a nervous moment. The FTSE 100 was down more than 1% at one point yesterday, dragged lower by mining stocks as gold and all other major commodities fell.

You can take two views on the rate rise. It could be a tweak at the margin by a responsible central bank that wants to curb some of the wilder lending after seeing the economy grow 10.2% in the first quarter. Alternatively, it's a case of too little, too late and the Chinese are panicking, in which case so should we.

Frankly, it's too early to tell; 2005 was meant to be the year the Chinese economy landed, in either hard or soft fashion. It didn't happen. It must at some point, but the first signal will probably not come from the People's bank. Rather, one should look to China's biggest customer - all those Americans addicted to cheap Chinese goods in Wal-Mart.

In that sense, this week's most significant statistic was one the markets barely debated. It was the $15,000, or 6.5%, monthly drop in the average selling price of homes in America. There is a proper worry.

Big beasts return

This column mentioned yesterday that, after a storming five-year run by mid-sized companies, some of the best value in our stock market may be found among the biggest beasts. GlaxoSmithKline was one highlighted and, on cue, the drugs group produced strong quarterly figures, with vaccines, where sales rose 44%, the star turn.

The best news is that the mood music says the chief executive, J-P Garnier, is set against another mega-merger. That suggests Glaxo believes its own hype about the quality of its drugs pipeline. You'll have to wait until 2008 to see the full fireworks but Cervarix (for cervical cancer), Tykerb (breast cancer) and Trexima (migraine) do look genuine potential blockbusters. The drugs industry may never again enjoy the easy profits of the early 1990s - the squeeze on US and European health budgets has seen to that -but the best of the breed are still decent stores of long-term value.