Many young Chinese in the red as easy credit drives up debt

BEIJING: When Wu Qi and her husband traded in their Mazda 3 for a more expensive Mercedes Benz sedan, they applied for a 200,000 yuan (RM123,766) bank loan to help pay for it.

They got the money within minutes.

Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford.

They are the faces of China’s growing addiction to debt, which along with government and corporate borrowing, has raised fears of a looming crisis and prompted Moody’s ratings agency to slash the country’s credit score last week for the first time in nearly three decades.

Since Chinese leaders turned on the credit taps in late 2008 to shield the country from the global recession, household borrowing has soared and pushed China’s overall debt liabilities above 260 per cent of gross domestic product — compared with about 140 per cent before the crisis hit.

But slowing growth in China has raised concerns that years of risky lending could lead to a disaster worse than the US subprime collapse.

“While such debt levels are not uncommon in highly rated countries, they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China’s,” said Moody’s.

Household debt has become the major driver of China’s credit growth, expanding by an average of 19 per cent a year since 2011, said Chen Long, an economist at Gavekal Dragonomics.

If it continues to grow at this pace, household debt would reach roughly 66 trillion yuan by 2020 and potentially 70 per cent of gross domestic product versus 30 per cent back in 2013.

“Other countries have usually taken decades to complete such an increase,” said Chen.

“For bank lending to households to rise very rapidly usually means lending standards are loosened so credit is extended to both more and less creditworthy consumers.”

Mortgages make up the bulk of household debt.

Chinese have long favoured putting their savings into bricks and mortar due to the low bank deposit rates on offer, volatility in the stock market and strict rules that make it difficult to invest money abroad.

But as apartment prices have soared — often doubling within a few years, particularly in major cities — fears of a real estate bubble have mounted.

The government has responded by periodically tightening restrictions on property purchases and hiking minimum down payments — up to 80 per cent for a second home here, according to state media — to stabilise the market.

Facing dire warnings, Chinese policymakers are taking action to tighten balance sheets, halt risky lending and dispose of bad loans.

But there are doubts about Beijing’s willingness to clean house given its heavy reliance on freewheeling credit to drive economic growth. AFP