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Young Chinese are mired in debt

UNITED STATES, WASHINGTON (OBSERVATORY) — Western economists have long said that China needs an extensive layer of American-style consumers to ensure sustainable economic growth. Now he has appeared in the Middle Kingdom – this is her youth.

While older generations are extremely frugal (the result of many years of turbulent economies with a weak social protection network), 335 million people under the age of 30 (or those born in China from 1990 to 2009) behave more and more like Americans: spend recklessly on various gadgets, entertainment and travel.

Unlimited consumption helps China diversify its economy at a critical time. Beijing has relied on exports and infrastructure development for decades to spur growth, but signs of a slowdown have been more and more clearly seen in the face of restrictions imposed by the Trump administration.

The additional costs are very pleasing to Alibaba Group Holding Ltd., Tencent Holdings Ltd. and other high-tech companies whose rapid growth partly helps stimulate the Chinese economy, writes The Morning Star.

However, this consumption has a downside: the level of population debt has increased sharply over the past few years, and many young Chinese are increasingly borrowing money for their purchases.

The high level of corporate and public debt has long troubled Beijing. As the debt of the population increases, some economists believe that the debt burden of the country as a whole may turn out to be uncontrollable and slow down the growth of the Middle Kingdom.

To avoid future problems, population borrowing should be reduced to a moderate level, but it can also slow down the Chinese economy. Under the worst-case scenario, economists predict, a combination of high government, corporate, and consumer debt could accelerate the recession and cause a wider loss of confidence in China.

Short-term loans from online lenders such as the Ant Financial Services Group help increase costs. The rate of Ant Financial is on average 16% per annum, depending on the borrower’s credit history. A survey in 2018 in China found that about half of the respondents who received consumer loans were born after 1990.

Most of them took loans on various lending platforms, and for a third of borrowers short-term loans were needed to pay off other debts. Most worrying is the fact that almost half of them missed mandatory payments.

Ex-head of the Chinese central bank Zhou Xiaochuan warned last November that the growth of the financial and technological sector, which stimulates the consumer lending market, could push the young generation beyond their means.

The authorities stopped issuing licenses to new online lenders since the end of 2017 and tightened supervision over the fact that interest rates on loans did not exceed 36% per annum. As of July, less than 800 online lending organizations are operating in China, compared to 2,600 in early 2016, says wdzj.com.

According to JPMorgan, the ratio of the debt burden of the Chinese population to the country’s GDP will reach 61% by 2020, which is higher than in Italy and Greece at present. In 2010, this indicator amounted to 26%. In the USA, this ratio is at 76% after falling from 98% in 2006.

According to another indicator – the ratio of household debt to disposable income – China seems to have already surpassed the United States, reaching 117.2% in 2018 compared with 42 , 7% in 2008, the United States had 135% in 2007, after which this figure dropped to 101% in 2018.

Some economists do not see a cause for concern in connection with an increase in the debt burden of the population, since the level of defaults on consumer loans is still relatively low. Others say that China’s slowdown could intensify if young Chinese people lose their jobs or see their salaries go down and they have to cut spending drastically. If they do not and continue to borrow, they can become even more vulnerable.

“This generation has no idea what the difficult times are,” says Hong Kong-based Credit Suisse economist Dong Tao. “Any consumer lending boom will end sooner or later.”

He points to mortgage debt as an expanding problem in China, primarily for young people. Mortgage debt increased from $ 1.1 trillion in the fourth quarter of 2012 to $ 3.9 trillion in June 2019.

According to the People’s Bank of China, about a third of medium and long-term loans account for mortgages, an increase from 20% in 2012.

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