[Editorial] Easy Lending Drives Overspending -- The Problems Behind China's Payday Loans
Yicai Global
DATE:  Dec 27 2017
/ SOURCE:  Yicai
[Editorial] Easy Lending Drives Overspending -- The Problems Behind China's Payday Loans [Editorial] Easy Lending Drives Overspending -- The Problems Behind China's Payday Loans

(Yicai Global) Dec. 27 -- Consumption has played a key role in driving the growth of China's economy over the past few years. Consumer credit platforms, like Alibaba Group Holding Ltd.'s Ant Credit Pay, increased credit limits during the Singles' Day and Double-12 shopping festivals and allowed some cardholders to buy iPhone X handsets interest- and service charge-free. This could lead to severe problems.

Payday loans are the main cause for concern. Despite regulators stepping up efforts, the sector is still surrounded by controversy. These micro loans are different from typical consumer loans and are a major business division for financial institutions. Traditional consumer lending is mainly aimed at white-collar workers and public officials with a stable income, and annualized interest rates are less than 10 percent.

However, payday loans are geared toward low-income groups who struggle to secure a regular bank loan. Qudian Inc., one of China's online micro lenders, has attracted public attention after listing in New York. It serves over 500 million users who don't have credit cards, and counters bad credit with higher interest rates.  Listed payday loan providers are restricted by a maximum annualized interest rate of 36 percent, but non-public platforms set rates as high as 200 percent.

Some believe that the sector's rapid growth is fueled by demand -- payday loans in China currently total between CNY600 billion (USD92 billion) and CNY1 trillion. In the seven months through July, short-term consumer lending increased to CNY1.06 trillion, triple the figure for the same period last year and made up primarily of micro loans. There are more than 2,600 payday lenders, most of which came from P2P companies and offer online through websites, social media and apps.

Many insiders are skeptical of whether these huge payday loan values are really due to demand. Compared with developed countries, China sees lower per-capita income. Even in major cities, like Beijing and Shanghai, workers average monthly salaries lie around CNY6,500 (USD992). Lower-income workers earn half of that. They cannot secure traditional loans or credit cards and must resort to payday loans as their main borrowing channel. Platforms like Qudian allow these low-income workers to buy the latest iPhone handsets, which can cost upwards of CNY10,000, more than triple their monthly earnings.

Easy access to credit is seeing Chinese consumer spending rise quickly and payday lenders are feeling the benefit. Qudian's third-quarter report, its first since going public, showed it pulled in CNY1.45 billion in revenue for a CNY650 million profit, an almost 322 percent annual increase.

These platforms abuse low-income workers lack of self-discipline and radical consumption views. The typical Chinese stance is to keep expenditures within limits set by one's income, but the consumer-led economy is changing all of this. However, it isn't worth advocating borrow-to-spend consumption where people are spending more than they can afford.

Before regulators suspended lending to students, 'campus loans' were already a big hit with undergraduates. The Ministry of Education promised in 2014 that the government would ensure students would be able to afford tuition fees and living expenses without issues. Assuming it followed through on this promise, students are not seeking loans to pay necessary living expenses.

Payday loans do not require a deposit, so borrowers are likely to default if they cannot maintain their income. Recently, China's top financial bodies, the People's Bank of China, China Securities Regulatory Commission, China Insurance Regulatory Commission and China Banking Regulatory Commission, released new regulations on asset management to highlight the risks involved in micro lending.

Consumption is becoming increasingly important to China's economic growth, but we need sustainable, affordable consumption. We should not underestimate the sustainability issues and risks caused by credit-fueled spending.

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Keywords:   Consumer Finance,Payday Loans,Micro Lending,Consumption