MNI: Rising China Consumer Loans Heighten Leverage Risk

     BEIJING (MNI) - Short-term consumer financing products are booming this

year in China as fintech platforms and financial institutions ramp up their

offerings, but the credit expansion has bled into the overheated property

market, with consumers using such loans as substitutes for mortgage loans,

leading some to warn the practice has heightened China's leverage risk.

     Household consumer loans (HCLs) comprise both long-term and short-term

varieties, with long-term HCLs mainly comprising mortgage loans, while

short-term HCLs are usually used for normal household consumption needs. It is

the latter that are posing a greater risk to China's economy, although the

former also come with risks, given the dizzying rise in property prices in China

over the past several years. 

     According to the People's Bank of China, new short-term household consumer

loans of financial institutions totaled CNY1.51 trillion in the January-October

period, over triple the CNY404.5 billion in the same period last year. Although

the debt-to-GDP ratio in the household sector in China is about 55% at present,

much lower than the 80% in the United States, it is the highest figure among

emerging markets.

     Zhang Longmei, the IMF Deputy Resident Representative for China, at the end

of October warned about such debt at a financial conference in Beijing. "We are

concerned about the debt risks in China, particularly the rapid growth of

household debt."

     China started to accelerate the pace of developing banks' short-term

consumer lending products in 2014, but a large part of the borrowing has gone

into the property and equity markets -- which are supposed to be off limits for

such funds. In addition, some fintech platforms have provided excess credit in a

bid to generate higher interest revenue, further pushing up household leverage

and increasing the default risk of households.

     In recent years, consumption has replaced investment in China to become the

main driver of economic growth, while the financial sector has provided strong

support in the process. The emergence of bank consumer loans has satisfied the

credit demand of retail clients, but the rising tide of credit also means some

clients overshoot their repayment capacity. Although such stimulated

consumption, and the high household leverage that goes with it, can help push up

economic growth, it is also an unsustainable GDP driver.

     The fast growth of the short-term HCLs is closely related to commercial

banks' expansion of retail funding business at a time when their wholesale

funding businesses are struggling under the pressure of tightened financial

regulation.

     Consumer financing companies, which are often backed by banks, have seen

steep profit gains during the first half of the year. For example,

Merchants-Unicom Consumer Finance (MUCF), a joint venture of China Merchants

Bank, the most profitable commercial bank in China, and China Unicom, the

world's fourth-largest mobile network operator, pocketed a profit of CNY541

million in the first half of this year, a gain of 982% compared with the same

period last year.

     Liu Jianjun, the vice president of China Merchants Bank, said to

journalists at the end of August at a briefing that "As of the end of July, MUCF

had lent out over CNY140 billion to 126 million clients via consumer loans this

year." 

     He added that outstanding consumer finance loans of China Merchants Bank

had increased CNY2 billion in the January-July period.

     Behind the rise lies the simple fact that large-sum consumer loans that

used to be difficult for a consumer to get can now be easily obtained. 

     A manager in the credit department of a big commercial bank told MNI: "It

is quite easy to get [large] consumer loans at present. The clients in the

'white name list' [those with good credit records] can get CNY300,000 without

any collateral. The annual interest rate on average is 6%. For banks, it is good

trade, considering the benchmark one-year loan rate is just 4.35%."

     It is these loans that are often used, instead, to buy property -- with

banks often not bothering to check on the ultimate destination of the funds. 

     In addition to banks, consumers can borrow from e-commerce platforms and

online lending companies. During the Singles' Day shopping frenzy earlier this

month, Alibaba announced that it would raise credit limits, offer no-interest

installment loans through a service called Huabei (literally meaning "Just Spend

It"), which is a personal line of credit available on Alibaba's Alipay.

     Alipay has about 450 million users who can sign up to Huabei with just a

few clicks and get credit lines of CNY500 to CNY50,000. Even if the limit was

just CNY5,000 per person, the total loan amount with that many customers could

reach as high as CNY2 trillion -- a significant pile of leverage on China's

already mounting credit heap.

     Alibaba, the Chinese ecommerce behemoth, said its Singles' Day gross

merchandise sales hit $25.4 billion. To put these numbers into perspective, last

year's combined Black Friday and Cyber Monday sales in the United States only

totaled $6.5 billion.

     Many online financial platforms also offer cash loans as "consumer loans"

-- a concept borrowed from so-called payday loans in the United States, a type

of short-term borrowing where an individual borrows a small amount of money at a

very high rate of interest. In China, cash loans sometimes carry 50% interest

rates, much higher than the 36% legal limit, and mostly target blue-collar

workers and new graduates, which increases the default risk given their

relatively lower rates of pay.

     Zhang Xiaojing, deputy director of the National Institution for Finance and

Development at the Chinese Academy of Social Sciences, an official think tank,

said in a note that the leverage ratio of the household sector rose from 46.1%

in the first quarter to 47.4% in the second quarter. "Some short-term consumer

loans have been used for home purchases after mortgage loan controls were

tightened, which has worsened the leverage situation," Zhang said.

     Financial regulators have noticed the surge and have tried to rein in such

unregulated transactions, but in practice there is always a way consumers can

work the angles, and banks also turn a blind eye. As a manager at one commercial

bank told MNI: "It is a tricky game."

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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