It’s a truism that Chinese people don’t like to borrow – but one that may no longer be true. China hasn’t gorged on consumer lending in the way that U.S. shoppers did, but rising credit card activity shows their traditional aversion to debt is fading fast.
Household debt in China amounted to just 37 percent of GDP at the end of July, compared with 81 percent in the more overextended United States. But borrowing habits are changing fast. China’s total outstanding credit card balances, while less than 10 percent of household debt, were a third higher at the end of June than a year ago, according to the People’s Bank of China. The amount outstanding per card has increased by over two-thirds in two years.
Banks aren’t officially allowed to compete on deposit rates. Issuing Hello Kitty or Transformers branded credit cards helps. While issuance has slowed, the average credit limit is rising and holders have drawn down 40 percent of that, twice the figure at the end of 2010. Spending on credit cards issued by the four biggest listed banks increased 28 percent in the first half of 2014 – more than double the growth rate of retail sales.
Korea is a cautionary tale. Its crisis saw impaired credit card assets approach 18 percent of total balances in 2002. China is far behind. The average Chinese person has 0.3 credit cards, compared to the average Korean’s two. Korea’s credit card companies also funded themselves with wholesale debt. The vast majority of Chinese cards are issued by banks, which are funded by more stable bank deposits.
Card users may still be vulnerable to bad incentives. Credit cards offer liquidity when holding cash or short-term savings is unattractive. Savers can buy apparently safe wealth management products, and spend on credit until those products pay out. Some patterns are alarming. At Chongqing Rural Commercial Bank, average spending per card was 76,630 yuan in the first half of 2014, according to Breakingviews calculations – around triple that city’s average disposable income for a whole year.
For now, consumers quickly repay most of what they spend on their cards. But shifting habits are increasing China’s financial complexity. Once consumers develop a debt wish, it can be hard to rein them in.