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

New Straits Times - - Business -

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

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