Chinese youth spending frenzy fueled by debt sparks balance sheet

Many used short-term loans to pay for expenses such as high-profile cosmetics, electronic gadgets, and expensive restaurant meals. They found credit easy to obtain, thanks to Ant and other Chinese fintech companies that provided unsecured loans to millions of people who did not have a bank-issued credit card. In 2019, online loans accounted for up to half of short-term consumer loans in China, according to estimates by Fitch Ratings.

Now, new financial regulations are forcing lenders to reassess their business strategies and have sparked reflection on the American-style borrowing and spending habits of the young Chinese population. From 2022, Ant and his peers will need to fund at least 30% of the loans they make with banks, a rule designed to put more risk on online lenders.

In recent weeks, a popular Chinese social media campaign dubbed ‘come ashore’ – a metaphor for getting rid of debt – has gained momentum, with people sharing their experiences and regrets about overspending and borrowing. .

On microblogging sites Weibo and Xiaohongshu, another popular social media platform, people posted photos of shredded credit cards and screenshots that show them closing their online credit facilities. Some have described how to get out of debt by reducing daily expenses and avoiding unnecessary purchases.

“A top-down crackdown on overspending has sparked national introspection,” said Daniel Zhi, a KPMG China partner who heads its financial strategy advisory service, adding that the regulatory measure “put a lid on the whole online. – the loan industry. “

In November, a day before Ant’s successful public offering was withdrawn, a column by an official from a division of China’s banking and insurance regulator said that while consumption is a mainstay of China’s economy , financial institutions and fintech companies must act responsibly to protect the rights and interests of their consumers.

The official, Guo Wuping, said fintech companies allow people to borrow excessively, which has resulted in “some low-income people and some young people falling into debt traps.” He described Ant’s Huabei virtual line of credit service as inclusive but not supportive because some associated fees were higher than what banks charge on credit cards. Ant declined to comment.

Other Chinese state media have also criticized fintech platforms for encouraging young people to overspend. Last month, a report from China’s central bank said the country was trying to increase domestic consumption without relying on consumer debt. Default rates for short-term loans have been low, but officials are concerned about the risks that could arise if excessive borrowing is not reduced.

Ant, which is controlled by billionaire Jack Ma, is China’s largest provider of online short-term consumer loans. The owner of the popular payment app Alipay had the equivalent of $ 267 billion in consumer loans outstanding in June, accounting for nearly a fifth of total short-term Chinese household debt.

Ant Huabei and Jiebei’s personal loan services – meaning “just spend” and “just borrow” – were used by around half a billion Chinese citizens in the 12 months leading up to June alone. Most of the funding was provided by over 100 banks and other commercial lenders with which Ant is a partner.

Mona Wang, 27, who works in the financial industry in central Xi’an city, said at the end of last year she owed the equivalent of more than $ 15,000 to various online lenders and banks. , including Ant’s Huabei. and credit card issuers. The debt, which was about 15 times her usual monthly income, was largely the result of her spending on Salvatore Ferragamo shoes and other branded items, she said.

A few months ago, during Alibaba Group Holding Ltd.

The annual Singles Day online shopping festival, Ms. Wang said, used Huabei to splurge on items such as bottles of Moutai fiery liquor, Lululemon yoga clothes, a Dyson hair dryer and a vacuum. “They looked like bargains you shouldn’t miss,” she said.

Ms. Wang said that she later realized that she had overworked her finances and had sleepless nights. Fortunately, she says, a bounty she received in February has helped her pay off half of the debt, and she is now trying to carefully manage her spending to pay off the rest.

Ant and his peers ran ads that encouraged liberal spending behavior. A promotion of Huabei, which aired last October, featured a 37-year-old construction worker taking his daughter to a fancy restaurant for her birthday. Another showed a delivery boy who used Huabei to buy a saxophone with the words: “Don’t skimp on the things you like.”

Ant declined to comment on the ads. Since the IPO’s withdrawal, the company and its senior officials have said they are adjusting their business and Ant has made changes to the way it lends. In December, the company said it had lowered credit limits for some young borrowers to promote more rational spending habits, without providing details.

On Friday, Ant presented a framework on how he would self-regulate his various digital finance businesses. As part of this, the company said it would lend responsibly and not make loans to young and low-income borrowers beyond what is needed to cover their basic living costs.

Yuzhang Wang, 26, said his credit limit in Huabei was recently reduced to the equivalent of about $ 2,500 from more than $ 4,600. Mr. Wang lost his job last year at a vocational training institute in Beijing and fell behind on more than $ 30,000 in debt he had accumulated, including from Huabei, on expenses such as Gucci accessories. and Versace, iPhones and expensive dinners. He said debt collectors called him and his family, threatening legal action.

Mr. Wang has returned to his hometown, where he juggles working in a factory, driving for a transport company, and arranging weddings. He also resold some online purchases. He managed to reduce his debt by two-thirds.

Economists say they don’t expect China’s decline in online lending to dampen overall consumer spending significantly, given its importance to the economy.

“Consumption may suffer if online lending channels are tightened and if Beijing prioritizes controlling short-term financial risks,” said Aidan Yao, senior emerging Asia economist at AXA Investment Managers. However, he said Beijing wanted to maintain economic growth and therefore would not go so far as to severely limit consumption.

Katie Chen, a director of Fitch covering non-bank financial institutions in China, said regulators would not want to eliminate the entire online lending industry: “On the contrary, they want to make sure that online lenders don’t not take excessive risks that could threaten the stability of the financial sector. system.”

—Serena Ng contributed to this article.

Write to Xie Yu at [email protected]