Wrote by Tom Hancock, Wang Xueqiao
Struggling to find well-paid work after arriving in Shanghai as a graduate from a middle-ranked Chinese university, Tom Wang turned to another source to fund his spending: credit cards.
“Using credit cards did not feel like spending money, and the debt grew and grew,” said the 26-year-old, whose starting salary of Rmb3,000 ($470) a month could not cover rent and the consumption habits he called “irrational”, such as buying the latest smartphone.
To cover repayments and keep spending, Mr Wang took on more debt — borrowing Rmb60,000 over four credit cards — before turning to online lenders for a further Rmb70,000. Interest payments “snowballed” to Rmb1,500 a month, he said.
Mr Wang is part of a generation of young consumers who have rejected the thrifty habits of their elders and become used to spending with borrowed money. Outstanding consumer loans — used for vehicle purchases, holidays, household renovations and buying expensive household goods — in China grew nearly 40 per cent last year to reach Rmb6.8tn, according to Chinese investment bank CICC.
Combined with a rapid growth in mortgage lending, which makes up most of China’s household debt, consumer loans pushed household borrowing to Rmb33tn by the end of 2017, equivalent of 40 per cent of GDP. The ratio has more than doubled since 2011.
Some economists fear that the build up of household debt will hurt long-run consumption growth as consumers divert an increasing portion of their incomes to repayments. Large-scale defaults by consumers would put pressure on the solvency of lenders, potentially triggering a financial crisis.
While borrowing restrictions make widespread mortgage defaults unlikely, high-interest consumer loans are more risky. “It’s a Pandora’s box . . . the consumer loans industry has been booming so fast,” said Lu Weiting, chief executive of consumer debt collection company Weimi Technology. “Over the past five years it has been crazy. The barrier to entry [for new lenders] has been low if not zero.”
A study of 54 economies by the Bank for International Settlements found that household debt can have negative long-run effects on consumption, which intensify when borrowing exceeds 60 per cent of GDP. China’s ratio, while higher than most developing country peers, is below EU and US levels of 60 and 80 per cent of GDP respectively. But the differential “could narrow quickly if left unchecked,” according to rating agency Fitch.
The surge in consumer credit has so far helped Beijing achieve its aim of making consumption the main driver of economic growth. As Beijing pushed the corporate sector to deleverage, households became the largest recipients of new credit in China’s banking system for the first time last year. “It became harder to depend on the corporate sector to maintain growth. So the government thought it could use household leverage,” said Kaiji Chen, an economist at Emory University in the US.
Consumer loan growth has been accelerated by the emergence of hundreds of online peer-to-peer lenders who collect money from retail investors and dispense small loans to consumers without collateral. Banks have been reluctant to issue such loans due to the difficulties assessing the creditworthiness of individuals.
Outstanding loans on P2P platforms rose 50 per cent last year to total Rmb1.2tn, according to industry monitoring service Diyiwangdai. Interest rates can range up to 37 per cent, with additional charges for late payment.
Consumers in their twenties have been the core customers. “They feel peer pressure and the importance of investing in themselves . . . It could be English classes, vocational training, weddings, travel, or buying the latest iPhone,” said Benny Li, chief executive of platform Huaxia Finance.
Aside from a central bank database that provides limited information, China lacks credit data on consumers. While the average US consumers’ credit history dates back 14 years, in China “you are lucky to have a few months — this is our challenge”, said Mr Li. “Where we are today is probably similar to the 70s or 80s in the US when Sears and JCPenny were issuing credit cards,” he added.
China’s first unified private personal credit information service, Baihang, launched in February and has signed up 15 platforms, but most still perform their own checks. Huaxia relies on telephone records and calls to applicants’ relatives, said Mr Li. Other companies claim to use AI systems to scour customer’s social media contacts to detect their creditworthiness.
Non-performing loans reported by listed Chinese P2P platforms are about 8 per cent on average — four times the official figure for the banking sector. The NPL ratio for the P2P sector as a whole could be as high as 15 per cent, according to Mr Weiting. The proportion of overdue loans is even higher, at around 50 per cent, he added, often due to fraud.
Mr Chen estimated that China’s household debt burden was equal to about 80 per cent of total disposable income — meaning consumption would collapse if households tried to repay all their debt at once.
With average mortgage maturity around 16 years, a more realistic worry, say analysts, is that mortgage repayments will crimp consumption. Chinese households use nearly 17 per cent of their monthly income to repay debt, according to the China Household Finance Survey, up from 11 per cent in 2013. For low-income households, the percentage rises to 47 per cent.
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