Property accounts for most household debt on the mainland. Photo: AFP

How China’s young people became addicted to debt

Easy access for millennial consumers has helped nearby double the nation’s overall debt-to-GDP level

When Wu Qi and her husband traded in their Mazda 3 for a more expensive Mercedes Benz sedan, they applied for a 200,000 yuan (US$29,000) bank loan to help pay for it. They got the money within minutes.

Quick and easy access to credit has encouraged many young Chinese to go into the red to buy cars and apartments they could not otherwise afford.

They are the faces of China’s growing addiction to debt, which along with government and corporate borrowing has raised fears of a looming crisis and prompted Moody’s ratings agency to slash the country’s credit score last week for the first time in nearly three decades.

“It is very easy – the car company encourages you to borrow the money and enjoy the car,” said Wu, 39, adding the couple was also paying off a one million yuan mortgage for a flat in Beijing.

Since Chinese leaders turned on the credit taps in late 2008 to shield the country from the global recession, household borrowing has soared and pushed China’s overall debt liabilities above 260 per cent of gross domestic product – compared with about 140 per cent before the crisis hit.

But slowing growth has raised concerns that years of risky lending could lead to a disaster worse than the US sub-prime collapse.

“While such debt levels are not uncommon in highly rated countries, they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China’s,” Moody’s said.

Household debt has become the major driver of China’s credit growth, expanding by an average of 19 per cent a year since 2011, said Chen Long, an economist at Gavekal Dragonomics.

If it continues to grow at this pace, household debt would reach roughly 66 trillion yuan by 2020 – more than double the current level.

“Other countries have usually taken decades to complete such an increase,” said Chen. “For bank lending to households to rise very rapidly usually means lending standards are loosened.”

Mortgages make up the bulk of household debt. Chinese have long favoured putting their savings into bricks and mortar due to the low bank deposit rates on offer, volatility in the stock market and strict rules that make it difficult to invest money abroad.

“It’s a safe choice,” said homeowner Charlie Liu, 26, who also rents out her flat on Airbnb to help cover the repayments on her 1.4 million yuan mortgage.

But as apartment prices have soared – often doubling within a few years, particularly in major cities – fears of a real estate bubble have mounted.

The government has responded by periodically tightening restrictions on property purchases and hiking minimum down payments – up to 80 per cent for a second home in Beijing.

Charlie Liu in her apartment in Beijing. She rents it out on Airbnb to help cover the repayments on her 1.4 million yuan mortgage. Photo: AFP

But prices continue to rise, forcing young homebuyers deeper into debt.

Wang Yuchen, 28, borrowed three million yuan from the bank in August to buy a 4.75 million yuan apartment in Beijing. He turned to his parents and friends to help pay the deposit.

“In 2012 I could have bought the same apartment for 1.5 million yuan,” Wang said. “I’m a little bit worried but there’s nothing I can do. Last year I was getting married and it’s tradition in China that you have to have your own house to get married.”

Borrowing money for a car is also becoming more popular as consumers, particularly millennials, take advantage of very low interest rates.

Facing dire warnings, Chinese policymakers are taking action to tighten balance sheets, halt risky lending and dispose of bad loans.

But there are doubts about Beijing’s willingness to clean house given its heavy reliance on easy credit to drive growth.

“We will see how it can extricate itself from the same ‘grow now ask questions later’ trap that all other command economies have slipped into in the past,” said Michael Every, senior Asia-Pacific strategist for Rabobank.

This article appeared in the South China Morning Post print edition as: Get it on credit: China’s youth on borrowing binge