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December 15, 2016

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Consumer debt: It’s swim or sink in rising credit tide

CHINESE millennials don’t have that thrifty streak that led their parents and grandparents to be called a nation of savers. Instead, they want to shop, shop, shop, and it’s causing a borrowing binge in consumer credit.

In fact, personal debt levels are now at a record high. Lending channels, both mainstream institutions and newer non-financial entities, are readily expanding into what is a trillion-yuan business.

Explosive loan growth at Ping An Puhui, the consumer finance arm of one of the biggest Chinese insurers Ping An Group, is an example of the trend.

Ping An Puhui is expected to have issued about 180 billion yuan (US$26.1 billion) of new loan volume in 2016, more than doubled of last year, the company said.

“We are quite different from what we were in the beginning of this year,” said YongSuk Cho, chairman and chief executive officer of Ping An Puhui. “We added two business lines last year, and now all three of our business lines are generating profits for the Puhui.”

In November, Ping An Puhui attracted more than 500,000 new customers, taking its loan portfolio close to 25 billion yuan. About 70 percent of that debt came in unsecured loans, its main business line.

The business model changed after the company shifted its traditional system to a data-driven one , with no more use of its paper-based approach of assessing customer creditworthiness three years ago, Cho said.

The volume of new customers and new business makes Ping An Puhui the biggest player in the consumer finance market in China.

The strategy of collecting information “of clients but not from clients” relies on third-party data from administrative and legal sources.

Data analysis of “customer clusters” has led the company to expand its lending targets to those without any credit record or even those without steady incomes. That expands the potential scale of customers far beyond the central bank’s credit pool of around 361 million.

“At a conservative estimate, China’s consumer-credit market will swell to 52 trillion yuan by 2020, with the participation of non-bank financial institutions rising to nearly 20 percent from nearly 5 percent now,” Cho said.

The engines of credit growth are the rampant consumerism of the young generation and the nation’s relatively low personal debt level, compared with advanced economies in the world, market insiders said.

According to Munich-based management consultancy Roland Berger, a fifth of consumer spending in China was financed by borrowing in 2015, below the 41 percent in South Korea and 28 percent in the US.

“There is a profound shift in attitude,” Yu Zhuowei, a credit manager from the Bank of Communications, wrote in an email reply to Shanghai Daily. “The bedrock principle of personal financial management is changing from conservative saving to credit consumption.”

That, of course, creates huge opportunities for lenders, Yu added.

An account manager at Industrial and Commercial Bank of China surnamed Qiao told Shanghai Daily that transactions involving consumer credit have topped several billion yuan in Shanghai so far this year. Most banks will be promoting borrowing through the end of the year to beef up their balance sheets, she added.

More players

The plot thickens as new players, such as Chinese e-commerce giants Alibaba and, expand in the consumer finance market.

Ant Financial Services Group, the Alibaba financial arm with over 450 million annual active users, said customers who bought less than 1,000 yuan worth of products a month online upped their purchases 50 percent after being offered credit through the company’s pay-by-credit service Ant Huabei, which means “just spend.”

The debt binge has its downside.

More than 4,000 players have squeezed into the booming peer-to-peer online lending market in less than three years, but nearly 57 percent of them are facing cash crunches or fraud allegations. Their problems are blamed on an absence of regulatory oversight and the poor credit behavior of some borrowers, according to Online Lending House, a portal site that tracks the sector.

Loan sharks in the market caused a public uproar when the media revealed their practice of requiring students who apply for loans to provide nude photos of themselves as collateral.

Can consumer finance survive all the potential risks?

Although credit losses at Ping An Puhui remain at a low at 5 percent, according to Cho, risk control and post-loan management remain crucial elements in keeping the business afloat.

“I hope we could control the credit loss within 6 percent,” said Cho. “Since once the rate reaches at about 8 or 10 percent — the industry’s ideal average — it’s very easy for the losses to get out of hand and soar to 20 percent or 30 percent. We don’t want that to happen.”

Czech-based consumer finance company Home Credit Group, which made net loans of 3.25 billion euros (US$3.46 billion) in China as of June 30, said it doesn’t extend debt to those it deems at risk of not repaying it.

Ping An Puhui’s Cho said a borrower’s repayment history on first loans is used to determine whether further credit may be extended.

“If a customer’s status deteriorates, we will focus more on debt collection,” he said.

The trend of young Chinese falling deeper and deeper into debt worries some experts. For one thing, it can lead to taking risky shortcuts.

Shanghai Daily reported earlier that some borrowers in Shanghai took out multiple consumer loans from different institutions to make up the down payment on a home. In addition, sometimes consumers aren’t aware of high usury rates charged by unsavory lenders.

“It’s too early to worry about the personal debt level at present,” said Chen Li, an analyst at Credit Suisse in Hong Kong. “Mortgage lending has been limited by the government’s crackdown on an overheated property market, and that may curb overall credit demand.”

He added, “But we should always keep an eye on the situation before the younger generation gets in over its head, spending too much and finding their finances out of control.”


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