High time na­tion re­duced its ap­petite for debt

China Daily (Canada) - - FRONT PAGE - By NICK BEVENS ni­cholas@chi­nadaily.com.cn

Two re­cent an­nounce­ments, both rep­re­sent­ing fur­ther un­charted fi­nan­cial ter­ri­tory for China, set off alarm bells for me. In the first, we heard that a pi­lot con­sumer scheme that of­fers loans to low-in­come groups was be­ing ex­panded. Pri­vate cap­i­tal, do­mes­tic and for­eign bank­ing in­sti­tu­tions and In­ter­net com­pa­nies are all be­ing en­cour­aged to set up con­sumer credit com­pa­nies, and the ap­proval pro­ce­dures for these will be made eas­ier, in­clud­ing no re­quire­ment for col­lat­eral. The ad­min­is­tra­tive power to ap­prove the newlen­ders and their ap­proval pro­ce­dures— pre­vi­ously con­trolled by the bank­ing reg­u­la­tor— will be del­e­gated to pro­vin­cial gov­ern­ments.

The sec­ond re­vealed that credit card bor­row­ing grew35.5 per­cent dur­ing the first three months of the year and av­er­age credit lines jumped to 14,700 yuan ($2,400) from 12,300 yuan a year ear­lier.

With an es­ti­mated $7.8 tril­lion of de­posits, thanks to rapid in­come growth, rises in home prices, and the coun­try’s tra­di­tion­ally high sav­ings ra­tio, Chi­nese savers have more-than-enough pri­vate as­sets to ab­sorb any reck­less spend­ing.

But the moot ques­tion is whether the gov­ern­ment should be so ea­ger to en­cour­age more in­di­vid­ual debt.

Econ­o­mists tend to viewdebt as a prac­ti­cal means of get­ting money to where it is most needed, from those with an ex­cess of it, to bor­row­ers who are short of it.

The mes­sage in this case was loud and clear: “Get peo­ple spend­ing, es­pe­cially young af­flu­ent pro­fes­sion­als, in this post-ex­port, con­sumer-driven era”.

Daily we read about the on­go­ing Chi­nese love-af­fair with­Western con­sumer goods, es­pe­cially by the bur­geon­ing and youth­ful mid­dle class. Many of them have al­ready used years of sav­ings to buy their first homes, backed up with con­tri­bu­tions from fam­ily and even friends, and I can bet that many of them are lever­aged to the hilt.

There are also many who are gam­bling on the very-Western— and ul­ti­mately ill-founded— belief that their salaries, their prop­erty val­ues and their coun­try’s econ­omy will keep on grow­ing, and in­ter­est rates will stay con­sis­tent.

E-com­merce giants such as Alibaba, JD.com and Sun­ing have al­ready launched in­stall­ment ser­vices which give Chi­nese con­sumers largely un­fet­tered ac­cess to loans to buy goods on their online shop­ping sites.

Ac­cord­ing to fig­ures supplied re­cently by BNP Paribas, China’s house­hold debt was equiv­a­lent to just 23 per­cent of house­hold fi­nan­cial as­sets and 10 per­cent of to­tal Chi­nese fi­nan­cial as­sets in 2014.

How­ever, in the con­text of a wider do­mes­tic econ­omy which ap­pears to be in­creas­ingly anx­ious about cor­po­rate and par­tic­u­larly gov­ern­ment debt, I still can­not help think­ing that push­ing more con­sumer debt could lead to trou­ble if not con­trolled with an iron fist.

The line in the first an­nounce­ment, of con­trol over these newlen­ders be­ing handed to— al­ready debt-heavy, in most cases— lo­cal gov­ern­ments, alerted me most.

That is be­cause the eco­nomic text books tell us very of­ten it is not the debt that gets out of con­trol in ex­plo­sive credit booms, but the man­age­ment of lend­ing stan­dards. Out­stand­ing per­sonal loans in China stood at 7.7 tril­lion yuan by the end of last year, ac­cord­ing to the Bos­ton Con­sult­ing Group, which ex­pects them to race to 17.5 tril­lion yuan by 2018.

China’s na­tional bal­ance sheet is still firmly in Bei­jing’s fa­vor, but eco­nomic history shows credit swings have moved in reg­u­lar cy­cles of op­ti­mism and pes­simism and there is no rea­son to think the na­tion is au­to­mat­i­cally im­mune to such seesaws.

If in­ter­est rates rise, economies slow, jobs are lost, and house­holds and firms of­ten re­spond by selling as­sets, spend­ing less to re­pay debt, or sim­ply de­fault.

Here are three ques­tions I would ask any­one in China con­sid­er­ing load­ing their list of di­rect debts with con­sumer credit pay­ments: Howvul­ner­a­ble are you? What might scup­per your abil­ity to pay? Howis the wider econ­omy per­form­ing?

Prop­erty prices and ex­panded mort­gage lend­ing have pre­vi­ously led many credit booms and busts. So here’s a fourth: What is the prop­erty mar­ket look­ing like?

The Chi­nese gov­ern­ment un­doubt­edly has some strong mon­e­tary tools avail­able to con­tain any con­sumer debt cri­sis. But let us hope theWest’s ad­dic­tion to this par­tic­u­lar kind of ex­cess never catches on here. Con­tact the writer at ni­cholas@chi­nadaily.com.cn

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