UnionPay and Ant Financial are successful lending models. In many ways, they are changing Chinese culture. In contrast to their parents, the Chinese equivalent of America’s Millennials are compiling debt. As we know in the U.S., consumer debt fuels the economy. Our consumptive habits help circulate money. This is new in the East, and as the WSJ notes in today’s front-page article, there is an uneven feeling about debt.
- One of the most popular ways to borrow is a Huabei account, a revolving credit line embedded in China’s Alipay mobile payments network. Huabei has extended loans in excess of 1 trillion yuan, or more than $140 billion, since its launch in April 2015, a person familiar with the matter said.
- China’s former central banker Zhou Xiaochuan warned last November that the rise of fintech, while helping develop the consumer credit market, may “excessively induce” the younger generation to spend beyond its means.
- Yang Huixuan, 22, who graduated from college this year and works in communications for a soccer club in Nanjing, says she turned to Huabei while in school. She says she often borrowed around $100 a month to pay for meals out, cosmetics and clothes that she couldn’t cover with the roughly $215 stipend she got every month from her parents. She relied on Huabei’s installment payment function to afford bigger items like cameras and smartphones.
- Huabei is “truly addictive,” says Ms. Yang, “It gives me an illusion that I’m not really spending my own money.” Ms. Yang says she’s scaling back some now because of higher living costs and because she’s reluctant to keep turning to her father for money.
Well, at least she does not have student loan debt. Forbes reports that in China, “Student debt is virtually non-existent.”
Consumer debt is changing the culture in China, the WSJ claims.
- Easy credit has come from a wave of online micro-lenders and peer-to-peer lenders, which proliferated several years ago amid loose regulations. Some charged exorbitantly high interest rates.
- Authorities have halted issuing licenses to new online lenders since late 2017, and tightened oversight to ensure interest rates on some loans are capped at an annual percentage rate of 36%.
- The average consumer spending of Chinese credit-card holders between ages 21 and 30 in 2016 was around $8,820, 39% higher than their average credit line of $6,360.
There is limited parental wisdom for debt. Their parents never could spend forward in China. You probably got a scolding from your parents about assuming debt and getting in over your head. I surely did, even though my first job, long ago and far away, was in the credit business. Even today, I think twice about carrying debt!
- Wang, who earns about $600 a month working at a Beijing bookstore, says he now puts his entire salary toward paying down his debt. He still relies on credit cards to pay for food and rent, and sometimes uses one credit card to pay back another.
- JPMorgan estimates China’s ratio of household debt to gross domestic product will climb to 61% by 2020. That’s up from 26% in 2010 and higher than current levels in Italy and Greece.
- The level in the U.S. is about 76%, after falling from 98% in 2006, according to the International Monetary Fund.
Well, I guess a little credit never hurt anyone (though a lot of credit can.)
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group