Zhong Weiyi, who owns an auto dealership just outside the sprawling western city of Chengdu, China, isn’t feeling very confident about the country’s economy.
“If housing prices and pensions keep shrinking, I wonder what kind of security I will have in my 70s,” said 58-year-old Zhong.
An increasingly common belief is that China’s struggling economy, faced with headwinds on a range of fronts—particularly its flatlining consumer sector—is now being hit even harder as households begin paying down their sizable debts.
This trend of deleveraging is taking money away from the productive area of consuming goods and services and reallocating it to servicing debts, which are mainly in the form of mortgages and credit card bills.
There’s a more worrisome explanation for consumers’ reluctance to spend—and their increasing tendency to save even while holding large amounts of debt. A lack of confidence among citizens about their current financial situations, and China’s broader economic plight, better explain this conservative consumer behavior, at a time when Beijing desperately needs hordes of shoppers to ignite activity in its vast domestic market, research shows.
Good luck with turning that around, most analysts say, as a wobbly property market is only making people more nervous and government efforts to boost consumption have been mis-targeted and insufficient, when they aren’t simply absent. “Boosting consumption may be the best solution, but the government’s plans to do so don’t seem credible,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research.
Chinese have reasons to save beyond the falling value of their homes, which are their core nest eggs. China’s once revered pension system’s future is becoming muddier each year. The country’s rapidly aging population soon will not be able to be supported by a dwindling number of working-age contributors to the social security system, and the pension system is already feeling the effects.
The government increases the pension rate each year to keep up with rising costs of living. But those increases have tumbled. In 2006, officials raised the monthly pension compensation by 23.7%. After years of declines, that rate hit 3.8% in 2023.
Despite these incentives to invest, options in China are lacking. The property sector is unstable, the stock market is volatile and what many equity analysts call “irrational,” and emerging wealth-management areas are struggling to mature.
For instance, China’s $2.9 trillion trust industry is in increasing trouble. Partially as a result of increasing government regulation, the massive sector has been restructured six times since it formed decades ago and now faces losses that may amount to $38 billion, Goldman Sachs analysts said this week.
Meanwhile, China’s household debt hit a fresh high of 63.5% of the country’s GDP in the second quarter, according to a report last month from the National Institution for Finance and Development. That is a sliver away from the 65% red line the International Monetary Fund uses as a warning point for serious financial instability.
While the lion’s share of that is in mortgages, many Chinese who are spending—particularly youth with lower incomes—are doing so with little financial discipline, using a raft of easy borrowing through Chinese fintech apps such as Ant Group’s Alipay,
Tencent’s
(700.Hong Kong)
WeChat,
and
Meituan
(3690.Hong Kong). None of the credit-lending firms responded to Barron’s request for comment.
One profligate borrower, Angel Wu, a 27-year-old who has recently returned to Shanghai after completing a masters degree in the U.K, said she was representative of her friend circle. While she has struggled to find a job—the unemployment rate in her age group is in the double digits—she has been busy buying consumer goods on easy credit, with a tap of her phone.
She gave Barron’s a video tour of recent purchases in her tiny studio apartment in China’s priciest city. In the last month, she has purchased nearly 70,000 yuan ($9,700) in retail goods, all on credit. The big-ticket items include clothing from her favorite store, Max Mara. (Wu showed Barron’s screenshots of her purchases on each app, as well as her current debt accounts.)
Her other weak spots are high-priced fountain pens. She recently bought a Montblanc-sold Beatles special-edition pen for 7,000 yuan ($961), bringing her luxury writing-utensil collection up to 10. Her other big buys were cosmetics and China’s ubiquitous food delivery—“which can add up quickly if you’re not buying a bowl of noodles every day,” she said.
The apps offering these credit lines often target younger Chinese and don’t employ Western-style checks of their repayment credibility. Interest rates are frequently exorbitant, and are sometimes charged daily, not monthly.
“On one app, my debt grows by about 65 yuan ($9) per day. I’ll pay it off when I get employed, even though it’ll have grown by then,” she told Barron’s.
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