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
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.
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.