Banks resisting credit cards max-out might be negative for economic stimulus but prudent

Chinese banks are wise to resist maxing out their credit cards. Lenders have issued hundreds of millions of them to local consumers, facilitating debt-fuelled shopping sprees. It’s a lucrative but risky supplement to other types of lending, and some banks now appear to be pulling back.

Banks in China had issued more than 650 million credit cards as of the third quarter of 2018, up from less than 450 million three years earlier, official data show.

Balances payable on the cards reached 6.6 trillion yuan ($980 billion), an increase of more than 120 percent over the same period. Lenders are keen on this profitable business. There’s still a big opportunity for further growth given the relatively low penetration rates: the average Chinese individual has only half of a credit card, whereas the average American has three. Plastic can be profitable, too, yielding higher interest rates and fees for the banks than typical corporate loans, thus boosting net interest margins.

Yet a reassessment may be underway, according to analysts at Citi Research. At Shanghai Pudong Development Bank, for instance, credit card lending made up 35 percent of total new loans in 2017. In the first half of 2018, that figure had collapsed to negative 5 percent.

It’s a similar story at China Merchants Bank and other lenders covered by the analysts – although some banks are still aiming for rapid growth, including Ping An Bank and Postal Savings Bank of China.

Household credit stood at around half of GDP by the middle of last year, up from 18 percent a decade earlier, according to the Bank for International Settlements. Fitch Ratings forecasts that household debt might reach 100 percent of disposable income by 2020, just below the 105 percent ratio in the US. However, the current economic slowdown could make bankers’ love of plastic look somewhat rash.

Individuals tend to default on card debt first, and chasing after them in court is time-consuming, and expensive, while recovery rates, sometimes estimated at below 16 percent, compare poorly with between 50 percent to 60 percent for corporate borrowers.

The Citi analysts estimate that a 3 percentage point rise in the unemployment rate would cut households’ debt repayment budget by about 1.2 trillion yuan, equivalent to around 17 percent of the total credit card balance. More caution might be negative for earnings and the economic stimulus, but it would certainly be financially prudent.