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September 12, 2016

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Playing fast and loose with consumer credit

APRIL is a friend of mine and one of the most honest people I know. She works for a commercial bank in Shanghai.

Even when complaining about stressful days and tough clients who don’t pay back their loans on time, she manages to stay cheerful and optimistic.

So I was a little bit taken aback last week when April called me in an almost hysterical voice to tell me about something that had happened at the bank.

“Four of my colleagues are thinking of using our bank’s loans to group buy a new house costing 12 million yuan (US$1.8 million),” she said. “They asked me to join them, and I initially said I would. But now I’m not so sure.”

“Group buying?” I replied. “How is that possible?”

I was referring to some regulations Shanghai unveiled in March to cool what looked like an overheating housing market. Five unrelated individuals can’t register for the same flat.

But even beyond that, the question remains: how can five middle-class bank employees afford a total investment of 12 million yuan?

“They are using consumer loans from our bank,” April explained. “Each bank employee is eligible for up to 500,000 yuan of credit without a documentary review. Those loans would go toward the down payment. The home would be registered in the name of a newlywed colleague, since he can qualify as a first-time homebuyer and enjoy the preferential interest rates for that in Shanghai.”

April sighed.

“They are betting that property prices will continue rising and they can cash in eventually,” she said. “Are they crazy?”

Setting aside the possible disputes that could arise in such a five-way investment, the math might be attractive. Assuming current rates of home price appreciation, a person like April could earn the equivalent of five years’ salary by speculating in property.

“It’s so risky,” she said. “What if there’s a sudden cooling in the property market?”

In the end, April backed out, leaving four colleagues to carry on with the plan. So far, it hasn’t gone well. The financing is a bit harder with just four, and the flat they originally intended to buy was snapped up by someone else.

For April, it was also a matter of conscience — the idea of using consumer credit for something other than what it is intended. It was the first time I had ever heard April expressing anxiety over what might be called “grey market” credit practices.

To me it’s just another example of people getting sucked into the frenzy of buying on credit. Mortgage lending can’t completely cover the skyrocketing cost of real estate, so consumers are simply finding other financing channels to help them get into the property market.

In the last property-buying spree, buyers turned to property agencies or so-called online peer-to-peer platforms to get the necessary down payments. At least six top agencies and 664 of the existing 2,500 online lending platforms tapped into housing loan services last year, according to consulting firm Yingcan Group.

Now it seems to be the turn of consumer loans, which rose to 19 trillion yuan last year and could surge another 20 percent in the next few years, according to the 2016 China Consumer Finance Report by consulting company iResearch.

The problem for the marketplace is that consumer loans, unlike mortgages, aren’t tracked closely by lending institutions.

I checked the official websites of big five lenders and found that all of them are offering unsecured consumer loans up to 300,000 yuan. Sometimes more.

Traditionally, consumer loans are used for purchasing household items, such as appliances or electronics, or for clothes, cosmetics or holidays.

An account manager at Industrial and Commercial Bank of China, who agreed to talk if I used only her surname Qiao, said transactions involving consumer credit have topped several billion yuan in Shanghai so far this year, and most banks will be promoting such credit through the end of the year to beef up their balance sheets.

Commercial banks are obviously eager beavers in this lending. I received several phone calls recently from a credit manager surnamed Hu at Ping An Bank.

“Listen, miss,” he said, in somewhat slippery tones. “If you work for a reputable company and draw a decent salary, I can give you 800,000 yuan of credit at an average annual 5 percent interest rate. It’s really quick and easy to apply. You don’t even need to tell us how you plan to use the money.”

I was touched by his “generosity,” but it made me wonder what kind of risks the banks are taking by offering such easy credit. Is the creditworthiness of borrowers even checked?

“It’s hard for banks to track the use of consumer loans,” said Sophie Jiang, head research on mainland and Hong Kong banks for Nomura International. “Traditional banks are skilled at dealing with corporate loans and knowing a borrower’s business model, but they are relatively unfamiliar with personal customers or their credit use.”

I tend to be a cautious person when it comes to taking on debt, but many people intent on making what they think can be quick money — say, in property — seem only too happy to use whatever lending channel they can find.

But as more middle-class families shed debt aversion and latch onto consumer loans, their household budgets will require ever-larger room for repayments.

Lanzhu, another friend of mine, who works for a UK architecture company and gets a decent salary, is like me. She steers clear of easy credit offers because she doesn’t want her life complicated by a pile of loans to pay off.

She told me the sorry circumstances of a former classmate, who now works for Shell Energy China in Beijing.

“He sold his home for 7 million yuan and bought a larger one for 14 million yuan, using both mortgage and consumer loans,” Lanzhu said. “But then his company laid off 50 percent of staff, and he’s panicked that he may be in the next round to go. In the worst case, he will have to sell his big house and return to his days of renting.”

That’s the risk for all the people jumping on the consumer credit bandwagon. They have to keep their fingers crossed that their jobs are secure and their health remains good. Otherwise, they may discover the bitter truth about how onerous debt can be.


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