Chinese Economy Slows as Nobody Wants Personal Loans

Map of China on Yuan
The Chinese financial system has been slowing down for several months now, but when the government tried to kick start the economy by encouraging lenders to issue loans, borrowers didn’t take the bait.

As a result, bank lending plummeted in April, according to the People’s Bank of China, as borrowers are avoiding personal loans out of the feeling of uncertainty. Uncertainty has given rise to widespread economic fear as citizens and businesses have watched their profits dwindle over the past few months, reported the Wall Street Journal.

“We don’t need any expansion of credit because we are playing it safe,” explained Stanley Lau, the managing director of Renley Watch Manufacturing Co., a Hong Kong-based watch exporter, to the WSJ.

This phenomenon has the Chinese government in a panic since their traditional method of turbo charging the economy is failing.

“It is critical for bank lending to stabilize or pick up in order to support the steady economic growth,” said Huang Yiping, an analyst at Barclays Capital, to the WSJ.

But data released for the lending statistics in April 2012 revealed that medium- to long-term personal loans equated to only $20 billion. While that may sound like a large sum, it is down by an alarming 46 percent from this time last year.

In fact, the WSJ says the decline in personal loans and business financing has been occurring since the beginning of 2010.

When the WSJ asked the Chinese banking system what was going on, they were told the problem is due to the economy.

“Because of the growing uncertainty over the economy, a lot of businesses are reluctant to borrow and, instead, they have decided to put their project or expansion plans on hold,” said the senior executive of a large Chinese bank.

At least one business, however, blames the current personal loan terms for his lack of motivation to borrow.

“High interest rates are one reason not to borrow more,” Huang Fajing, president of Wenzhou Rifeng Lighter Co., a cigarette lighter exporter, told the WSJ.

China’s one-year lending rate for business personal loans rests at 6.6 percent. Many companies, like the Wenzhou Rifeng Lighter Co., say that rate is too high to see an adequate return on.

Chinese leaders, however, are reportedly hesitant to cut rates out of fear of promoting inflation.