China's Generation-Z Is Developing An Ugly Addiction To Easily-Accessible Debt


China’s generation Z, not unlike millennials in the U.S., are developing an ugly addiction to debt. This was highlighted in a recent Bloomberg piece that highlighted examples like one 23 year old Shanghai resident who found himself $1,500 in debt to a smartphone app. 

His spending habits are made possible buy Huabei, a credit card that’s part of Alibaba’s ecosystem. He routinely spent more than his sole source of income, which was his parents 8,000 yuan (~$1,200) monthly allowance. When fell under a pile of debt, he tried to borrow his way out of it and pay in installments. It didn’t work, and his parents had to bail him out. Hubei charged him 0.05% per day, which is about 18.25% annualized. 

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His story is typical for China’s Generation Z. Born between the mid 90’s and early 2000’s, this generation has little income and “virtually no credit history”. But that doesn’t stop them from having access to banks, fintech startups and peer to peer lenders (in addition to other unregulated channels). 

Formal household borrowing is now 54% of GDP in the first quarter, rising more than 4% in a year. China’s ratio is still lower than the U.S. (66%), Hong Kong (72%), or South Korea (100%) but the rapid increase is worrying regulators and analysts. Fitch said in July that periods of debt-fueled consumption “can often be followed by sharp market corrections.”

And it’s the younger generation that’s the concern. 

Former People’s Bank of China Governor Zhou Xiaochuan said last year that the younger generation is being prompted to overconsume from technology. And there could be consequences for the broader economy if this type of debt starts to erode household liquidity, according to the Shanghai University of Finance and Economics. 

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China, as a country, remains in the midst of a longer-term shift from an export and investment led growth model to a modern consumer economy. A consumer debt crisis would obviously throw a wrench in those gears in a big way. 

Unsecured lending is up 20% a year in China since 2008. Services like Hubei offer revolving lines of credit for between 500 and 50,000 yuan. Balances can be repaid in monthly installments, as well. Alibaba rivals like have similar products. 

Regulators have tried to crack down on peer to peer lending and the sector has shrunk to half of its peak size. Data showed that nearly 70% of peer to peer lenders were younger than 40. 

The worrying part is that loans on these platforms often aren’t counted in official data. And one consulting firm says that the amount of consumer finance available through the internet will more than double, to 19 trillion yuan, by 2021.


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