China’s debt-fueled youth spending spree sparks a reckoning

Chinese regulators trying to curb Ant Group Co. and a growing online lending industry have one target in their sights: the excessive and debt-fueled lifestyles of the country’s youth.

Ahead of last year’s coronavirus pandemic, a new generation of tech-savvy and free-spending citizens helped fuel increased consumption, a growing driver of China’s economy.

Many used short-term loans to pay for expenses like high-end cosmetics, electronics, and expensive restaurant meals. They found that credit was easy to come by, thanks to Ant and other Chinese fintech companies providing unsecured loans to millions of people who did not have bank-issued credit cards. In 2019, online lending accounted for up to half of short-term consumer loans in China, according to Fitch Ratings estimates.

Now, new financial regulations are forcing lenders to re-evaluate their business strategies and have led to a reckoning of the American-style borrowing and spending habits of China’s younger population. Starting in 2022, Ant and his peers will have to fund at least 30% of the loans they make together with banks, a rule designed to make online lenders take more risk.

In recent weeks, a grassroots campaign on Chinese social media called “disembark” – a metaphor for debt relief – has gained momentum, with people sharing their experiences and regretting overspending and borrowing.

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

“A top-down crackdown on overspending has sparked an examination of national conscience,” said Daniel Zhi, a partner at KPMG China who runs its financial strategy consulting service, adding that regulatory action has “put a brake on everyone online. ” credit industry “.

“A top-down crackdown on overspending has sparked a national examination of conscience.”

– Daniel Zhi, KPMG China

In November, the day before Ant’s successful IPO was withdrawn, a column by an official from a division of China’s banking and insurance regulator said that while consumption is a mainstay of China’s economy, Financial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 that fintech companies allowed people to borrow excessively, causing “some low-income and young people to fall into debt traps.” He described Ant’s Huabei virtual credit line service as inclusive but not favorable, as some associated fees were higher than those charged by banks 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 is trying to increase domestic consumption without relying on consumer debt. Default rates on short-term loans have been low, but officials worry about the risks that could arise if excessive loans are not reduced.

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

Ant, Huabei and Jiebei’s personal loan services, which means “just spend” and “just borrow,” were used by approximately 500 million Chinese citizens in the 12 months to June alone. Most of the funding has been provided by around 100 banks and other commercial lenders that Ant partners with.

Mona Wang, a 27-year-old who works in the financial sector in the central city of Xi’an, said that 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 totaled 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 Limited.

The annual Singles Day online shopping festival, Wang said, used Huabei to splurge on items that included bottles of Moutai burning liquor, Lululemon yoga clothes, a Dyson hair dryer and a vacuum cleaner. “They just looked like bargains that you shouldn’t miss out on,” he said.

Ms. Wang said that she later realized that she had overloaded her finances and had a few sleepless nights. Fortunately, she said, a bonus she received in February helped her pay off half the debt, and she is now trying to carefully manage her expenses to pay the rest.

Ant and his peers used to run ads promoting liberal spending behavior. A Huabei promo, unveiled last October, showed a 37-year-old construction worker taking his daughter to a fancy restaurant for her birthday. Another showed a delivery man using Huabei to buy a saxophone with the words, “Don’t skimp on the things you love.”

Ant declined to comment on the ads. Since the IPO was withdrawn, the company and its top officials have said they are rectifying their business and that Ant has made changes to the way it lends. In December, the company said it had lowered credit limits for some younger borrowers to promote more rational spending habits, without providing details.

Chinese state media has criticized fintech platforms for encouraging young people to overspend.


Thomas Peter / Reuters

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, low-income borrowers beyond the amounts needed to cover their basic living expenses.

Yuzhang Wang, 26, said his Huabei credit limit was recently lowered to the equivalent of about $ 2,500 from more than $ 4,600. Wang lost his job last year at a vocational institute in Beijing and fell behind on more than $ 30,000 in debt that he had accumulated, including from Huabei, on outlays like Gucci and Versace accessories, iPhones and expensive dinners. He said debt collectors had called him and his family, threatening them with lawsuits.

Wang returned to his hometown, where he juggles working in a factory, driving for a transportation company, and hosting wedding parties. He has also resold some online purchases. It has managed to reduce its debt by two thirds.

Economists say they do not expect the decline in China’s online lending to severely curb overall consumer spending, given its importance to the economy.

“Consumption is likely to suffer if online lending channels tighten and if Beijing prioritizes controlling short-term financial risks,” said Aidan Yao, senior economist for emerging Asia at AXA Investment Managers. However, he said Beijing wants to keep economic growth high and therefore would not go so far as to severely limit consumption.

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

Write to Xie Yu at [email protected]

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