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Shoppers with face masks walking out of a mall in Beijing as the pandemic shrinks the nation’s much-vaunted army of consumers. Photo: Reuters

China’s US$1 trillion consumer loan bubble is bursting as army of borrowers flinch under pandemic strain

  • Fuelled by a shift towards leveraged spending, China’s consumer finance expanded 10-fold in the past decade
  • Lenders now face a wave of delinquencies as businesses fold and job losses hit repayment ability
China’s consumer loans are shrinking at an unprecedented pace after a decade of breakneck expansion, a blow to the government’s strategy of relying on spending as a growth engine amid the worst public health crisis in a generation.

The net balance of consumer loans – made up of short-term and credit card loans from banks and online lenders – plunged by a quarter in the first two months of this year to 7.4 trillion yuan (US$1 trillion), according to data published by the People’s Bank of China. Some microlenders are staring at 20 cents on a dollar in bad loans.

The nation’s much-vaunted army of consumers are flinching as the coronavirus outbreak closes shops and causes job losses, hurting demand for new credit and ability to service older ones. A wave of delinquencies will test the resilience of Chinese lenders this year, with the economy expected to be at its weakest since the 1976 Cultural Revolution.

“The next one to two months will be the most difficult time for China’s consumer finance industry since its formation,” said Xu Xiang, researcher who specialises in consumer finance at Tsinghua University’s Institute for China’s Economic Practice and Thinking in Beijing.

“The non-performing loan (NPL) ratio will rise in the second and third quarters and cause a significant impact on consumer credit firms,” said Xu, who is also an associate professor at the Central University of Finance and Economics in the capital.

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The slump this year represents “the first major consumer credit down-cycle” in the sector, with an estimated 53 million people still kept out of offices and factories at the end of March, analysts led by Bruce Pang at China Renaissance said in a report on Tuesday.

Lenders are becoming more cautious in granting loans, which could worsen the downturn as many borrowers will face greater trouble refinancing their debts, they said.

In an example of lenders under the cosh, New York-listed online microlender Qudian Inc said a key delinquency rate surged to over 20 per cent in March from 13 per cent in the preceding quarter.

Fuelled by a shift in mindset towards leveraged spending among young people as well as tech that enabled instant loan applications, China’s consumer lending expanded tenfold to 10 trillion yuan last year in the past decade.

Short-term consumer loans surged by 13 per cent last year, according to central bank data. Credit cards make up about 70 per cent of consumer lending, and online lenders – either independent or backed by internet giants – took up the rest, according to China Renaissance.

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Mashang Consumer Finance, one of the largest licensed online consumer loan lenders in China, expects the industry to now gravitate towards borrowers with stronger credit profiles, according to chief executive Zhao Guoqing.

Travel restrictions imposed across the country in February have hindered the work of debt collectors, which is crucial to making new loans as well as the viability of the business, said Zhao, whose company is based in Chongqing city in southwestern China.

“As debt collection work was affected, borrowers’ willingness to repay has decreased,” he said in an email interview. “Their ability to repay is impacted by changes in income and other debts, and some took advantage of the timing to evade their obligations. All of these factors will push up the NPL ratio of the entire industry.”

While the first two months are seasonally weak, the crash this year is unmatched in size since the central bank began publishing the data in 2007. The data for March will be crucial for the economy, as demand never failed to rebound that month every year.

China’s economy is widely expected to contract in the first quarter for the first time since 1976, when the Cultural Revolution ended. Standard Chartered Bank forecasts a 2.5 per cent expansion in 2020, which would also be the slowest since the revolution crippled the economy.

The coronavirus pandemic has killed more than 3,300 and infected at least 81,000 in mainland China. It has ravaging the US and European nations and is threatening to plunge the global economy into a recession. This means evaporating orders for China’s manufacturers, compounding losses from the US-China trade war over the past two years.

In response, China has handed out coupons to encourage spending as it began to ease controls over restaurants and shopping malls in recent weeks. The central bank has also lowered borrowing costs and persuaded banks to ease or defer loan repayments to overcome the crisis.

“Many financial institutions that look normal now actually face a huge hidden problem [of bad debt],” said Liu Feng, chief economist at China Galaxy Securities. The negative impact of the pandemic has not fully manifested yet as banks will accumulate more non-performing loans in the next two months, he added.

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China Merchants Bank, a major commercial bank based in the southern city of Shenzhen, said borrowers’ willingness and the ability to repay credit card and individual loans declined, and delinquencies in credit-card loans, mortgages and micro loans rose significantly in February.

The bank has 40 per cent of its debt collection personnel located in Wuhan, the epicentre of viral outbreak in central Hubei province, chief executive Tian Huiyu said in a post-earnings call in late March. The suspension of work there also played a role, he added.

Zhao of Mashang Consumer Finance in Chongqing city remains hopeful about the industry’s future. His company has waived some penalties and extended the repayment deadline for clients who lost income temporarily due to the pandemic.

“The impact of the virus is short-term,” he said. “I believe this will pass and the long-term growth prospect of China’s consumer finance industry will not change because of it.”

 

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