When Wu Qi and her husband traded in their Mazda 3 for a more expensive Mercedes Benz sedan, they applied for a 200,000 yuan (US$29,173) bank loan to help pay for it.
They got the money in minutes.
Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford.
They are the faces of China’s growing addiction to debt, which along with government and corporate borrowing, has raised fears of a looming crisis and prompted ratings agency Moody’s Investors’ Service to slash the nation’s credit score last week for the first time in nearly three decades.
“It is very easy — the car company encourages you to borrow the money and enjoy the car,” 39-year-old Wu said, adding that the couple is also paying off a 1 million yuan mortgage for a three-bedroom apartment in Beijing.
Since Chinese leaders turned on the credit taps in late 2008 to shield the nation from the global recession, household borrowing has soared and pushed China’s overall debt liabilities above 260 percent of GDP — compared with about 140 percent before the crisis hit.
However, slowing growth in China has raised concerns that years of risky lending could lead to a disaster worse than the US subprime mortgage collapse.
“While such debt levels are not uncommon in highly rated countries, they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China’s,” Moody’s said.
Household debt has become the major driver of China’s credit growth, expanding by an average of 19 percent per year since 2011, Gavekal Dragonomics (龍洲經訊) Beijing-based economist Chen Long (陳龍) said.
If it continues to grow at this pace, household debt would reach about 66 trillion yuan by 2020 — more than double the current level — and potentially 70 percent of GDP versus 30 percent in 2013.
“Other countries have usually taken decades to complete such an increase,” Chen said. “For bank lending to households to rise very rapidly usually means lending standards are loosened so credit is extended to both more and less-creditworthy consumers.”
Mortgages make up the bulk of household debt. Chinese have long favored putting their savings into bricks and mortar due to the low bank deposit rates on offer, volatility in the stock market and strict rules that make it difficult to invest money abroad.
“It is a safe choice,” said homeowner Charlie Liu, 26, who also rents out her apartment on Airbnb Inc’s Web site to help cover the payments on her 1.4 million yuan mortgage.
As apartment prices have soared — often doubling within a few years — fears of a real-estate bubble have mounted.
The government has responded by periodically tightening restrictions on property purchases and hiking minimum down payments — up to 80 percent for a second home in Beijing, according to state media — to stabilize the market.
However, prices continue to rise, forcing young homebuyers deeper into debt.
Wang Yuchen, 28, borrowed 3 million yuan from the bank in August last year to buy a 4.75 million yuan apartment in Beijing.
Lacking enough cash, Wang turned to his parents and friends to help pay the deposit.
“In 2012, I could have bought the same apartment for 1.5 million yuan,” Wang said. “I’m a little bit worried, but there is nothing I can do. Last year, I was getting married and it is tradition in China that you have to have your own house to get married.”
Borrowing money for a car is also becoming more popular as consumers, particularly millennials, take advantage of low interest rates.
Auto financing has been soaring by 40 percent a year and high-speed growth in the sector is expected to continue, Roland Berger consultancy automotive expert Ron Zheng (鄭贇) said.
“Before I bought this new car I never thought I would change my old car because nowadays you can hire a car using [ride-hailing apps] Didi and Uber, which is quite convenient,” Wu said. “And then I found that a new car is not that expensive.”
Facing dire warnings, Chinese policymakers are taking action to tighten balance sheets, halt risky lending and dispose of bad loans.
However, there are doubts about Beijing’s willingness to clean house given its heavy reliance on freewheeling credit to drive economic growth.
“We will see how it can extricate itself from the same ‘grow now ask questions later’ trap that all other command economies have slipped into,” Rabobank senior Asia-Pacific strategist Michael Every said.
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