The shift to a consumer-driven economy continues in China, as credit card debt grew six-fold since 2012. S&P Global Ratings expects 20% growth, year over year, through 2022, the South China Morning Post reports.
An area of stress is credit bureau reporting. Mature markets, particularly in Australia, Canada, the U.K., and the U.S. rely on credit bureau files and FICO Scores for credit decisioning. Developing economies have less experience and have not been tested under stress. The global financial crisis, slightly more than a decade ago, is a reference point, but remember that the Asian credit boom came afterward.
Seasoned issuers know the cyclical nature of consumer credit and build their business around the nuances of boom and bust.
- “We also anticipate that marginal players and latecomers to unsecured consumer lending are likely to compete aggressively, tapping into riskier customer segments,” Liang Yu, an S&P credit analyst, said in a research note.
- “Increasing business partnerships between banks and some types of fintech firms can also multiply asset-quality risk for some banks; in particular, banks with limited experience in unsecured consumer lending and/or inadequate capability in managing risks associated with a rapid increase in such exposures,” Yu said.
Markets vary. Mature economies are used to debt. As a culture, our parents and grandparents had mortgages and auto loans. Our parents grew up with the novelty of credit cards. Our kids have student loans. Our economy is built on the expectation that people will spend more than they have.
Not so in developing economies. In many instances, credit is new. For some economies, credit is hard to understand but very easy to get.
The heightened concern about household debt becomes important as consumer purchasing becomes a driver of gross domestic product.
The concern is what happens when the economy in developing economies shifts. In mature economies, from Sidney to Toronto, London, and Chicago, credit card issuers are used to the opportunity and risks each economic cycle brings. This allows you to look risk in the eyes, as the economy shifts through a cycle of expansion, peak, contraction, and trough. Baseline credit card loss rates of 3.5% may peak at 10%, but a good credit manager knows it is not permanent.
- “Asset quality may come under further pressure as China’s growth continues to moderate,” Yu said.
- Household debt as a percentage of GDP in China has grown from 29.9 percent in 2012 to 53.2 percent last year, according to figures from CEIC, a financial data provider. Household debt stood at US$7.4 trillion in China at the end of March, according to CEIC.
- Yu said China’s regulators are aware of the history of similar credit booms and taking steps to lower system-wide risks, noting that the People’s Bank of China is likely to continue to expand the scope of its credit monitoring system, which tracks borrower data from more than 3,500 banks. China also has capped annual interest rates on credit cards in a range of 12 percent to 18 percent, S&P said.
But the buzz-kill of regulators and central banks is important to consider:
- The International Monetary Fund warned two years ago that rising household debt in China “could amplify macroeconomic consequences of negative shocks”
- “Deterioration in the balance sheets of [highly indebted households in China] could have an amplified negative impact on the banking sector as well as on the macroeconomy, even though loans to households, including home mortgages, in China are still a smaller fraction of banks’ total assets than in advanced economies,” the IMF said in its Global Financial Stability report in October 2017.
The takeaway: growth will continue, but steady controls are important when the economy shifts. It will recover (sooner or later). By then, developing economies will be one step closer to maturity.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
