Is China’s debt burden too much to bear?
BEIJING — Demand for consumer loans is picking up in China, especially among the less affluent, highlighting a group that some say could use more support during the coronavirus-induced economic downturn.
The disease, officially called Covid-19, emerged late last year in the Chinese city of Wuhan. The virus has since spread rapidly around the world, killing more than 183,000 people, including over 4,600 in China.
While the coronavirus’ outbreak has stalled within the country, China is still trying to recover from the economic shock of weeks-long shutdowns, both domestically and now from export destinations.
Official and third-party data show that China’s poorest households are the hardest hit. In the first quarter, prices rose more in rural areas than cities. But spending dropped off less as necessities consumed a greater proportion of incomes. For migrant workers who still had jobs, the average monthly salary dropped nearly 8% to about $525. Economists estimate tens of millions had not returned to work by the end of March.
The economic pressure has led to a greater demand for loans, although it’s less clear whether people can actually get them. And if they do, some analysts note risk levels will increase.
A survey of Chinese households in the first quarter found that the poorest — those making 50,000 yuan ($7,142) or less a year — reported the highest level of consumer loan demand. The corresponding index jumped to 110.5, up from 100 in the fourth quarter, according to the latest report from the Survey and Research Center for China Household Finance at the Southwestern University of Finance and Economics.
The study was conducted from Feb. 21 to March 10, toward the tail end of the virus’ spread in China, and covered 30,688 respondents through Alipay, the mobile payments app run by Alibaba-affiliate Ant Financial.
The poorest segment also reported the greatest challenges in getting loans — with the index at 90.5, down from 100 the prior quarter. The perceived ability to get loans improved the wealthier the respondent, to the point that for the highest segment earning 300,000 yuan ($42,857) or more a year, it was easier to get a loan than there was demand to borrow, according to the survey.
A separate study of mostly young Chinese consumers found nearly two-thirds felt more positive after the coronavirus outbreak about using credit and installment purchase plans to make payments. The respondents saw the credit products as an effective way to offset the pandemic’s impact on personal finances, according to LexinFintech, whose installment purchase e-commerce site conducted the survey.
The coronavirus is changing payment methods, said Liu Meng, analyst and lead for Greater China digital financial services research at Forrester. He noted that because of budgeting pressure, more and more consumers may use fintech products to “buy now and pay later.”
For financial institutions, they must consider the higher risk of extending more loans to those who need them.
Consumers with better financial situations will borrow less right now because of greater uncertainty, while consumption will take up a higher portion of costs for those with poorer financial situations, said Hang Qian, principal at consulting firm Oliver Wyman’s finance and risk, and public policy practice. He predicts the level of non-performing loans will accelerate more quickly for those with poorer credit levels.
Calls for a targeted payout
Given the scale of unmet needs, a growing number of economists say authorities should implement a targeted cash payout. Over the weekend, an article from the China Finance 40 Forum, a group of prominent economists and financial leaders, suggested the Ministry of Finance should give three-month cash subsidies to households who have been unable to resume work due to the virus. The amount of the subsidy would depend on the number of elderly and children in the household, the article said.
Consumption in China could drop 11% this year if the central government doesn’t step up economic stimulus, Gan Li, professor of economics at Texas A&M University, said in a phone interview Tuesday. That’s based on a survey of consumer spending expectations.
“The low-income household(s) have suffered the most,” he said. “So based on that, we believe China needs a very large-scale, basically transfer policy, or subsidy policy, targeting (the) relatively poor.”
Gan’s proposal for distributing the subsidy is to expand an existing income tax app to cover those with monthly incomes of less than 5,000 yuan ($714). His calculations indicate a roughly 10% tax deductible for eligible households — accounting for more than 60% of those in China — would cost the government a minimum of 700 billion yuan ($100 billion). That would spur at least 500 billion yuan ($71.4 billion) in consumption, for an ultimate estimated contribution of 1 percentage point in GDP growth, according to Gan.
China’s Ministry of Finance and State Tax Administration did not immediately respond to a CNBC request for comment.
Consumption is frozen
So far, China has resisted distributing cash to its 1.4 billion citizens, in contrast to payouts implemented by the U.S. and Hong Kong. Some predict Chinese people would tend to save such a handout, rather than spending it.
The savings rate for urban residents in China was 37.1% in 2019, while that of migrant workers was lower at 30.2%, and even lower for rural residents at 22.5%, according to data from Gan. He said his analysis shows less affluent people would tend to spend more of any handout than wealthy individuals.
The central government’s policy has focused on supporting businesses and preventing layoffs by cutting interest rates, taxes and social insurance contributions. In the last few weeks, many local governments have also issued consumption vouchers in an attempt to spur spending.
However, the overall effect has yet to be seen. Morgan Stanley analysts said in a report Tuesday that: “Consumer behavior showed no improvement last week as socializing and discretionary consumption remained muted.”
Rather than vouchers or a blanket payout, cash should be given directly to key groups, such as the unemployed and poor families, Xu Hongcai, deputy director of the Economics Policy Commission at the China Association of Policy Science, said in a phone interview early last week. Even if financing costs are lowered, financial institutions won’t blindly issue loans to borrowers who are considered more risky, he added.
Distributing cash would add pressure to already burdened government coffers. National government revenue dropped 14.3% in the first quarter, while the 16 provinces and municipalities that have reported so far have all posted declines, according to data accessed through the Wind Financial Information database. Beijing’s revenue dropped 11%.
Small businesses need customers
But at this point, roughly three months since the virus forced much of China to temporarily shut down, a greater effort to boost individual spending could help the overall economy more, according to some economists.
If consumption can’t recover in April, then small companies may go bankrupt, Liu Xiangdong, deputy director of the economic research department at the Beijing-based China Center for International Economic Exchanges, said in an interview early last week. That’s according to a CNBC translation of his Mandarin-language remarks.
He pointed out the problem now is not necessarily availability of capital, but expectations of future demand. “Some companies are not willing to keep on operating, because if they keep on operating, then they will lose money.”
Retail sales plunged 19% in the first quarter as the spread of the coronavirus forced people to stay indoors. The decline narrowed to 15.8% in March, according to data released Friday.
Zong Liang, chief researcher at the Bank of China, said in an interview ahead of the data report that he expects consumption to bounce back in coming weeks, especially around the five-day Labor Day holiday that kicks off on May 1.
Consumer loans should also see very rapid growth in the second quarter, he said. The increased consumer demand would help struggling small and medium-sized enterprises, he said, if they can hold on for a little longer.
Individual consumer loans rose by 609.4 billion yuan ($87 billion) in March, after a rare net drop of 343 billion yuan in February, according to data released April 10 by the People’s Bank of China. Just over half of March’s increase went to home mortgages, while consumption loans accounted for 262.2 billion yuan, a 9.6% increase from a year ago, the central bank said.
“It can be seen that personal consumer loans saw a rather clear recovery in March,” Ruan Jianhong, head of the central bank’s statistics department, said at a press conference, according to a CNBC translation of her Mandarin-language remarks.
The central bank did not respond to a follow-up inquiry from CNBC on a breakdown of the loans by demographic.
“Generally speaking, banks’ consumer loans are not for poor people as they have pretty poor credit ratings,“ said Tianjun Wu, deputy economist at The Economist Intelligence Unit. “Poorer people usually get consumer loans from (peer-to-peer lending platforms) or family members which is not included in the PBC’s monthly report. However, the magnitude of P2P and family lending is still unknown as there are not much credible data available for that.”