Breakneck growth in China’s credit-card debt since 2012 raises worries about a potential bust, says ratings agency S&P

Credit-card debt has grown more than sixfold in China since 2012, mirroring booms in other Asian markets that ended badly and raising concerns about the potential risks to Chinese banks, according to a new report from S&P Global Ratings.

The credit rating agency said that unsecured consumer lending in the mainland is expected to increase at a rate of 20 per cent annually for the next two years, a slight slowdown, but reminiscent of problematic booms in Hong Kong, South Korea and Taiwan.

At the same time, the credit-score and credit-behaviour models used by banks in China have not been fully tested by a consumer downcycle, S&P said.

“We also anticipate that marginal players and latecomers to unsecured consumer lending are likely to compete aggressively, tapping into riskier customer segments,” Liang Yu, an S&P credit analyst, said in a research note.

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“Increasing business partnerships between banks and some types of fintech firms can also multiply asset-quality risk for some banks; in particular, banks with limited experience in unsecured consumer lending and/or inadequate capability in managing risks associated with a rapid increase in such exposures,” Yu said.

The heightened concern about household debt comes as domestic consumption in China has become a major driver of gross domestic product growth.

“Asset quality may come under further pressure as China’s growth continues to moderate,” Yu said.

Household debt as a percentage of GDP in China has grown from 29.9 per cent in 2012 to 53.2 per cent last year, according to figures from CEIC, a financial data provider. Household debt stood at US$7.4 trillion in China at the end of March, according to CEIC.

That ratio of household debt to GDP is lower than most developed markets, but higher than some other developing Asian nations, according to S&P. At the end of 2018, the ratio of household loans to GDP was 66 per cent in the US, 72 per cent in Hong Kong and 100 per cent in South Korea, according to S&P.

Yu said China’s regulators are aware of the history of similar credit booms and taking steps to lower system-wide risks, noting that the People’s Bank of China is likely to continue to expand the scope of its credit monitoring system, which tracks borrower data from more than 3,500 banks. China also has capped annual interest rates on credit cards in a range of 12 per cent to 18 per cent, S&P said.

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In a blog post in February, Federal Reserve economists Hunter Clark and Jeff Dawson said the rapid increase in household debt in China in recent years, driven primarily by growth in mortgages, has raised issues from a financial stability perspective.

“The risks related to household debt in China are generally viewed as manageable by most observers,” they said. “However, it is important to caution against being overly sanguine, especially since aggregate measures of debt and income may mask important differences among households.”

In 2018, household lending overtook corporate borrowing to become the largest driver of loan growth in China. It accounts for about half of all new loans.

The duo noted that non-mortgage household lending, such as credit cards, may be adding to the burden of borrowers who already have mortgages and unsecured revolving credit lines from peer-to-peer lending platforms.

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“This additional leverage is of particular concern for the roughly one third of household debt that is estimated to be held by highly indebted households,” the Fed economists said. “It also suggests that a deterioration in the balance sheets of these households could have a negative impact on the banking sector as well as on the economy.”

The International Monetary Fund warned two years ago that rising household debt in China “could amplify macroeconomic consequences of negative shocks”

“Deterioration in the balance sheets of [highly indebted households in China] could have an amplified negative impact on the banking sector as well as on the macroeconomy, even though loans to households, including home mortgages, in China are still a smaller fraction of banks’ total assets than in advanced economies,” the IMF said in its Global Financial Stability report in October 2017.

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Yu said a crucial area to watch in China will be cash advances and cash loans, which can play a “key role” in excess borrowing.

“At the peak of the credit-card bubble in Taiwan, banks’ cash-card balances made up near half of total card receivables (including credit cards and cash cards) outstanding. Rollovers between credit cards and cash cards led to spiralling debt problems,” Yu said.

“Although Chinese banks don't issue cash cards, they have increasingly started to conduct cash loan/consumer loan business either separately or bundled together with credit cards,” Yu said. “As the yield for this type of products is usually higher, we expect some bank players may tap into this area more deeply, especially after a regulatory clampdown drove out online players who offered similar services on peer-to-peer platforms.”