Chinese Youth Accept Debt, Stimulate Economy

Chinese credit card
Gone are the days when China preferred cash to credit cards—China is now taking on more personal debt and increasing opportunities for more lending companies.

China’s consumption loans, which include mortgages, credit card advances, car loans, and small personal loans, totaled 8.5 trillion yuan (about $1.35 trillion) last year. According to data from Boston Consulting Group, 2011’s statistics were 27 percent higher than in 2010. Consumer loans rose 17 percent to 232 billion yuan (about $37 billion) and credit-card lending rose a staggering 81 percent to 813 billion yuan (about $129 billion).

A large percentage of the new debtors include the younger Chinese generation. 22-year-old college student, Liu Qikun, took out a small personal loan to pay for a new cell phone. The small personal loan was from a kiosk run by Home Credit BV, located inside an electronics store. Her new phone, a Lenovo A520 smartphone, will cost 23 percent more than the original 1,782 yuan ($282) price. Qikun receives 1,000 yuan a month from her mothers, 300 yuan more than her living expenses require, and she teaches math for extra cash.

“I’m not worried. I’ll be able to pay it off,” Qikun said to the Wall Street Journal.

This new acceptance of debt could be positive news for China’s economy. In the cash-driven economy of China’s past, fewer lenders existed than today. Home Credit has plans to invest more than $129 million over the next two years in several Asian countries. They currently run credit kiosks at 15,000 small stores and 9,000 large retail stores including Suning Appliance Co. and Gome Electrical Appliances Holding Ltd.

Beijing, the second largest city in China, could prosper greatly from this new acceptance of small personal loan debt. A new domestic consumer culture, with reliance on public housing, bridges and highways, could be financially funded by this debt. Raising the average household debt is necessary to achieve that future. Currently, China’s individual spending accounts for a third of the country’s Gross Domestic Product (GDP). On the other hand, individual spending in the United States accounts for two-thirds of the country’s GDP.

According to the Wall Street Journal, financial industry participants found that the younger generations are willing to take on more debt than their older counterparts. Banks are preparing for this shift by installing loan software to catch delinquencies and to better evaluate new borrowers.

These preemptive measures are more than necessary. During the first six months of 2012, China’s balance of defaulting small personal loans rose 18 percent from the previous six-month period.

Many lenders, including Home Credit, have faced difficulties securing themselves in a country where credit history is scarce. Most Chinese lenders are given small financial documents, such as electricity bills and back-account transactions, in order to determine a borrower’s credit and their ability to repay a small personal loan. Credit scores and consumer databases are increasing, but they are not nearly as prevalent as in the United States.

Even though personal spending is increasing, it is not as high as original forecasts by Frankie Leung, a partner and director at Boston Consulting. The 32 billion yuan in consumer loans was half of the original prediction for 2011. Leung said consumer finance has been slower than expected.

“We find that the young are still spending, but spending by other groups is slowing.” Leung said to the Wall Street Journal.

The development of Chinese consumer finance only accounts for 15 percent of all loans: not yet enough to fuel domestic consumption.