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.
Photo: AFP
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.
INVESTOR RESILIENCE? An analyst said that despite near-term pressures, foreign investors tend to view NT dollar strength as a positive signal for valuation multiples Morgan Stanley has flagged a potential 10 percent revenue decline for Taiwan’s tech hardware sector this year, as a sharp appreciation of the New Taiwan dollar begins to dent the earnings power of major exporters. In what appears to be the first such warning from a major foreign brokerage, the US investment bank said the currency’s strength — fueled by foreign capital inflows and expectations of US interest rate cuts — is compressing profit margins for manufacturers with heavy exposure to US dollar-denominated revenues. The local currency has surged about 10 percent against the greenback over the past quarter and yesterday breached
MARKET FACTORS: Navitas Semiconductor Inc said that Powerchip is to take over from TSMC as its supplier of high-voltage gallium nitride chips Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) yesterday in a statement said that it would phase out its compound semiconductor gallium nitride (GaN) business over the next two years, citing market dynamics. The decision would not affect its financial targets announced previously, the world’s biggest contract chipmaker said. “We are working closely with our customers to ensure a smooth transition and remain committed to meeting their needs during this period,” it said. “Our focus continues to be on delivering sustained value to our partners and the market.” TSMC’s latest move came unexpectedly, as the chipmaker had said in its annual report that it has
Rick Cassidy, the chairman of Taiwan Semiconductor Manufacturing Co's (TSMC, 台積電) US subsidiary, TSMC Arizona Corp, plans to retire, but the company has yet to name a successor. After Cassidy made his intention to retire known, TSMC Arizona held a special general meeting and approved a resolution that Cassidy would not continue as chairman and would not remain as a director, TSMC said in a statement filed with the Taiwan Stock Exchange last night. The meeting also approved a plan to appoint TSMC Arizona president Rose Castanares as a director, the company said, adding that Cassidy has been named as an advisor
SECURITY WARNING: The company possesses key 3-nanometer technology, and Taiwan should prevent it from being transferred to China, a lawmaker said The Ministry of Economic Affairs yesterday said it would conduct a “strict review” of any proposed acquisition of Taiwanese tech company Source Photonics Co (索爾思光電), following media reports that a Chinese firm was planning to buy the company in the Hsinchu Science Park (新竹科學園區). Local media reported that Suzhou Dongshan Precision Manufacturing Co (東山精密), China’s largest printed circuit board manufacturer, had announced plans to acquire Source Photonics for 5.9 billion yuan (US$823.1 million). The ministry said it has not received an application from Source Photonics and has formally notified the company that any buyout would constitute a change in its ownership structure. The