China’s debt-ridden youth spending is an estimate

Many used short-term loans to pay for expenses such as prestigious cosmetics, electronic devices and expensive restaurant meals. They found credit easy to obtain, thanks to Ant and other Chinese financial technology companies that provided unsecured loans to millions of people who did not have credit cards issued by the bank. In 2019, online lending accounted for up to half of China’s short-term consumer credit, according to Fitch Ratings estimates.

Now, new financial regulations are forcing creditors to re-evaluate their business strategies and have raised an estimate of the American-style lending and spending habits of China’s younger population. Starting in 2022, Ant and his colleagues will have to finance at least 30% of the loans they grant together with the banks, a rule meant to make online creditors bear more risks.

In recent weeks, a grassroots campaign on Chinese social networks called “coming to shore” – a metaphor for becoming debt-free – has gathered with people who share their experiences and regrets about excessive spending and borrowing.

On the microblogging site Weibo and Xiaohongshu, another popular social networking platform, people posted photos with shredded credit cards and screenshots showing them the closure of online credit facilities. Some have described getting out of debt by reducing daily expenses and avoiding unnecessary purchases.

“A top-down crackdown on overspending has led to a national search for the soul,” said Daniel Zhi, a partner at KPMG China, which runs its financial strategy advisory service, adding that the regulatory action “has put the entire online cap on.” credit industry. ”

In November, a day before Ant’s initial official public offering was pulled, a column from an official in a division of China’s banking and insurance regulators said that although consumption is a mainstay of China’s economy. , financial institutions and fintech companies must act responsibly to protect the rights and interests of their consumers.

The official, Guo Wuping, said that fintech companies allowed people to borrow excessively, causing “some low-income and young people to fall into debt traps.” He described Ant’s Huabei virtual line of credit service as included, but not favorable, because some of the fees associated with it were higher than those banks charge on credit cards. Ant declined to comment.

Other Chinese state media have also criticized fintech platforms for encouraging young people to spend excessively. Last month, a report from China’s central bank said the country was trying to increase domestic consumption without relying on consumer debt. The default rates for short-term loans have been low, but officials are concerned about the risks that could arise if excessive borrowing is not reduced.

Ant, which is controlled by billionaire Jack Ma, is China’s largest provider of short-term online consumer loans. The owner of the popular payment app Alipay had the equivalent of $ 267 billion in outstanding consumer loans since June, accounting for nearly one-fifth of China’s total short-term debt.

Huabei and Jiebei’s personal loan services of ants – meaning “just spend” and “only borrow” – were used by about half a billion Chinese citizens in the 12 months to June alone. Most of the financing was provided by about 100 banks and other commercial creditors with which Ant.

Mona Wang, a 27-year-old woman working in the financial sector in central Xi’an, said late last year she owed the equivalent of more than $ 15,000 to various online lenders and banks, including Ant’s Huabei and credit card credit. The debt, which totaled about 15 times her regular monthly income, was largely the result of her spending on Salvatore Ferragamo shoes and other branded items, she said.

A few months ago, during Alibaba Group Holding Ltd.

Singles Day’s annual online shopping festival, Ms. Wang said, used Huabei to sprinkle items, including lighted bottles of Moutai liqueur, Lululemon yoga clothes, a Dyson hair dryer and a vacuum cleaner. “They looked like bargains you shouldn’t miss,” she said.

Ms. Wang said she later realized she had run out of money and had a few nights of sleep. Fortunately, she said, a bonus she received in February helped her repay half of her debt and is now trying to manage her expenses carefully to pay off the rest.

Ant and his colleagues used to run commercials that promoted liberal spending behavior. One of the promoters of Huabei, which took place in October last year, introduced a 37-year-old construction worker who was taking his daughter to an elegant restaurant for her birthday. Another person pointed to a deliveryman who used Huabei to buy a saxophone with the words “Don’t rummage through the things you love.”

Ant declined to comment on the ads. Since the IPO was withdrawn, the company and its top officials have said they are rectifying their business and that Ant has made changes to the way it lends. In December, the company said it had lowered credit limits for some younger lenders to promote more rational spending habits without giving details.

On Friday, Ant set a framework for how it will self-regulate its various digital finance companies. As part of this, the company has stated that it will lend responsibly and will not lend to young and low-income borrowers beyond the amounts needed to cover their basic living expenses.

Yuzhang Wang, 26, said his Huabei credit limit was recently reduced to the equivalent of about $ 2,500 from over $ 4,600. Mr. Wang lost his job at a vocational training institute in Beijing last year and was left with more than $ 30,000, including from Huabei, for expenses such as Gucci and Versace accessories, iPhones and expensive meals. . He said debt collectors called him and his family, threatening to sue.

Mr. Wang has moved back to his hometown, where he juggles working in a factory, running for a travel company, and hosting wedding parties. He also resold some online purchases. He managed to reduce his debt by two thirds.

Economists say China’s withdrawal of online credit is not expected to severely reduce global consumer spending, given its importance to the economy.

“Consumption is likely to be successful if online lending channels are tightened and if Beijing prioritizes short-term financial risk reduction,” said Aidan Yao, a senior emerging Asian economist at AXA Investment Managers. However, he said that Beijing wants to maintain economic growth and thus would not go so far as to severely limit consumption.

Katie Chen, director of Fitch covering non-bank financial institutions in China, said regulators do not want to eliminate the entire online lending industry: “Rather, they want to ensure that online lenders do not take excessive risks that could threaten system stability. . “

“Serena Ng contributed to this article.”

Write to Xie Yu at [email protected]