The wave of debt-driven youth spending in China generates a reckoning

Many used short-term loans to pay for expenses like prestigious cosmetics, electronic devices and expensive meals in restaurants. They found it easy to obtain credit, thanks to Ant and other Chinese financial technology companies that provided unsecured loans to millions of people who did not have credit cards issued by banks. In 2019, online loans accounted for up to half of short-term consumer loans in China, according to Fitch Ratings estimates.

Now, new financial regulations are forcing creditors to reevaluate their business strategies and have generated a reckoning on American-style lending and consumption habits of China’s youngest population. Starting in 2022, Ant and its peers will have to finance at least 30% of the loans they make with banks, a rule designed to make online lenders take more risks.

In recent weeks, a popular campaign on Chinese social networks dubbed “coming to earth” – a metaphor for getting out of debt – has been gaining momentum, with people sharing their experiences and regrets about excessive spending and borrowing.

On the microblog site Weibo and Xiaohongshu, another popular social media platform, people posted photos of torn credit cards and screenshots that show them shutting down their online credit facilities. Some described how they got out of debt, reducing daily expenses and avoiding unnecessary purchases.

“A top-down crackdown on excessive spending has led to a national conscience check,” said Daniel Zhi, a partner at KPMG China who leads his financial strategy advisory service, adding that regulatory action “has put a limit on the entire online- lending sector. “

In November, the day before the initial public offering of the Ant blockbuster was withdrawn, a column by an employee of a division of China’s banking and insurance regulator said that while consumption is a mainstay of the Chinese economy, financial institutions and fintech companies need to act responsibly to protect the rights and interests of their consumers.

The official, Guo Wuping, said that fintech companies allowed people to borrow excessively, causing “some low-income people and young people to fall into the debt trap”. He described Ant’s Huabei virtual credit line service as inclusive, but not favorable, as some fees associated with it were higher than those charged by banks on credit cards. Ant declined to comment.

Other Chinese state media outlets also criticized fintech platforms for encouraging young people to spend more. Last month, a report by China’s central bank said the country is trying to increase domestic consumption without depending on consumer debt. Default rates for short-term loans have been low, but the authorities are concerned about the risks that can arise if excessive borrowing is not restricted.

Ant, controlled by billionaire Jack Ma, is China’s largest provider of short-term online loans. The owner of the popular payment app Alipay had the equivalent of $ 267 billion in consumer loans outstanding in June, representing almost a fifth of China’s total short-term family debt.

Ant’s Huabei and Jiebei personal loan services – which mean “just spend” and “just borrow” – were used by about half a billion Chinese citizens in the 12 months preceding June alone. Most of the financing was provided by around 100 banks and other commercial Ant creditors.

Mona Wang, a 27-year-old girl who works in the financial sector in the central city of Xi’an, said that at the end of last year she owed the equivalent of more than $ 15,000 to several online lenders and banks, including Ant’s Huabei and credit card issuers. The debt, which amounted to about 15 times her normal monthly income, was largely a result of her spending on Salvatore Ferragamo shoes and other branded items, she said.

A few months ago, during Alibaba Group Holding Ltd.

At the annual Singles Day online shopping festival, Wang said, she used Huabei to splurge on items like Moutai liquor bottles, Lululemon yoga clothes, a Dyson hairdryer and a vacuum cleaner. “They looked like bargains you shouldn’t miss,” she said.

Wang said he later realized that he had overburdened his finances and slept a few nights. Fortunately, she said, a bonus she received in February helped her pay off half of the debt, and now she is trying to carefully manage her expenses to pay the rest.

Ant and his peers used to run ads that promoted liberal spending behavior. One of them promoting Huabei, which ran last October, showed a 37-year-old construction worker taking his daughter to a fancy restaurant for her birthday. Another showed a delivery man who used Huabei to buy a saxophone with the words: “Don’t skimp on the things you love”.

Ant declined to comment on the ads. Since the IPO was withdrawn, the company and its senior officials have said they are rectifying their business and that Ant has made changes to the way it lends. In December, the company said it reduced credit limits for some younger borrowers to promote more rational spending habits, without providing details.

On Friday, Ant presented a framework for how it would self-regulate its various digital finance businesses. As part of that, the company said it would lend responsibly and would not lend to young, low-income borrowers in addition to the sums needed to cover their basic living expenses.

Yuzhang Wang, 26, said his credit limit in Huabei was recently cut to the equivalent of about $ 2,500, from more than $ 4,600. Wang lost his job last year at a vocational training institute in Beijing and was left behind with more than $ 30,000 in debt he had accumulated, including Huabei, in expenses like Gucci and Versace accessories, iPhones and expensive dinners. He said that debt collectors called him and his family, threatening lawsuits.

Mr. Wang returned to his hometown, where he juggles working in a factory, driving to a hitchhiking company and organizing wedding parties. He also resold some online purchases. He managed to reduce his debt by two-thirds.

Economists say they do not expect a reduction in China’s online loans to severely undermine general consumer spending, given its importance to the economy.

“Consumption is likely to be affected if online lending channels are restricted and if Beijing prioritizes control of financial risks in the short term,” said Aidan Yao, senior economist for emerging countries at AXA Investment Managers. However, he said Beijing wants to keep economic growth high and therefore would not go so far as to severely limit consumption.

Katie Chen, director of Fitch who covers non-banking financial institutions in China, said regulators would not like to eliminate the entire online lending industry: “Instead, they want to ensure that online lenders do not take excessive risks that can threaten the financial sector stability system. “

—Serena Ng contributed to this article.

Write to Xie Yu at [email protected]