China's busy consumers flock to easier credit
Facing foreign competition in 2007, China's banks are expanding loan options.
When Xiao Yang ran a little short of cash to make the mortgage payments on her new apartment, the option that seemed best to her - take out another bank loan to buffer the difference.
She had her 24-year-old son do just that. She is confident they will repay both loans, once she collects the money her sister owes her from a while back.
It's a tale that would make a credit counselor's head spin in the Western world, but a scenario that is becoming increasingly common here as Chinese consumers, lured by the glitter of material wealth, take on previously unseen debt.
China is still largely a nation of savers. But that is beginning to change as the country's banks are rushing to expand consumer credit options. While the loosening of credit could be a boon for banks and a ladder up for consumers, analysts are concerned the pace of change might saddle China's troubled banking system with more bad loans and leave inexperienced borrowers over their heads in debt.
"The banks have been very lenient so far," says Li Kui-Wai, economics professor at the City University of Hong Kong. He notes that people have been able to get credit cards and loans by using false names and identification papers. "The system is really a problem," he says. "Who manages this? Which sector is it?"
Although the government has announced plans to implement a national credit system, and has implemented the first portions in major cities, there's no real mechanism to prevent banks from handing out loans like candy.
Along with steady increases in home loans, several international companies in the past year have won approval or announced plans to start offering auto-finance loans here. Already they've complained of loan defaults. Credit cards are fast gaining acceptance, accounting for 10 percent of all transactions in 2003, and usage, with 1 million Chinese cardholders, and the numbers growing every month, according to the central bank.
The push anticipates competition from foreign banks that will be allowed access to China's domestic market in 2007 under the WTO agreement.
Foreign banks are already knocking down China's doors to get a piece of the market. Although they hold less than 1 percent of the country's total banking assets, non-Chinese banks are a noticeable presence. Nine Chinese banks have international partners and another nine are in partnership talks, state-media reported last month. Their primary target is clear: not corporations or financial management, but Chinese consumers.
Personal money-management packages and consumer banking are ripe for international banks entering China, authorities say, because domestic banks have done little in that arena.
As the culture moves from one of personal savings to mass consumerism and heavy spending, economists say, they expect enormous growth in the amount of outstanding loans and credit-card debt. All this creates big business for banks, both international and domestic. Chinese banks are undertaking revamps and forming global alliances in preparation to compete.
"What is going to take place in China will dwarf anything we've ever seen," Elmer Funke Kupper, Asia-Pacific director for the Australia and New Zealand Banking Group told a conference in Shanghai in late October.
For Chinese consumers, who have little experience handling the new array of credit options, the changes open a new world of opportunity - and peril.
Traditionally, East Asian nations have personal savings rates of 40-50 percent of incomes, compared with just 20 percent among Western savers. While Chinese are still among the world's top savers with about $1.3 trillion in household saving, they are faced with taking on new weights of debt as prices rise and pressure mounts to buy with incomes that do not keep pace.
The country's leading consumer groups, which are affiliated with the central government, have not entered the banking and credit realms to offer consumer protection plans. Yet according to the Su Ning, the deputy governor the People's Bank of China, the nation's credit collection system now contains information about 80 percent of all outstanding Chinese currency loans.
The rush to hand out consumer credit exposes banks to risk as well.
"The growth in consumer credit, we believe, will lead some banks to fail," Mr. Kupper says, predicting that in three to four years, banks will start to lose some consumer loans.
So far, banking reform has generated most attention for its government bailouts ($45 billion and counting) of bad loans the state-run banks gave money-losing government operations under the communist system. According to estimates by Standard and Poor's Ratings Services, 31 to 35 percent of China's bank assets in 2004 were impaired.
But not all observers are concerned yet with the consumer lending being offered by China's banks.
Lawrence Yee, a China-based partner with the international law firm O'Melveney and Myers, said it is in the self-interest of banks and the Chinese government to place strict controls on lending.
"At the moment, I think banks are pretty careful about (consumer) loans," said Yee.
He pointed to recent central government rules that scaled back mortgages, allowing only 70 percent of the purchase price to be borrowed, rather than 80 percent. Still, recent studies show the moves have not cooled steeply rising housing prices or borrowing.
Mr. Su and others have promised rules and regulations that will assist banks and protect consumers.
Last month, the central bank announced it will combine credit records in seven cities in a central database to start the nationwide credit-check system.