Youth spending and fueled by China’s debt generates a calculation

Many used short-term loans to pay for expenses such as prestigious cosmetics, electronics and expensive meals at the restaurant. They found credit easy to obtain 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 a bank. In 2019, online lending accounted for up to half of short-term consumer lending in China, according to Fitch Ratings estimates.

Now, new financial regulations are forcing lenders to reevaluate their business strategies and have generated a calculation on the American-style spending and indebtedness habits of China’s youngest population. From 2022, Ant and his colleagues will have to finance at least 30% of the loans they grant together with banks, a rule designed to make online lenders more risky.

In recent weeks, a grassroots campaign on Chinese social media called “Landing,” a metaphor for leaving debt free, has been gaining strength, sharing its experiences and grievances about overspending and lending.

On the microblogging site Weibo and Xiaohongshu, another popular social networking platform, people have posted photos of broken credit cards and screenshots showing them shutting down their online credit facilities. Some described how to get out of debt by reducing daily expenses and avoiding unnecessary purchases.

“A top-down crackdown on excessive spending has sparked a national search for the soul,” said Daniel Zhi, a partner at KPMG China that runs its financial strategy consulting service, adding that the action regulator has “covered the entire network” credit industry.

In November, a day before Ant’s initial box office offer was withdrawn, a column from an official in a division of China’s banking and insurance regulator said that while consumption is a pillar of the Chinese economy, financial institutions and fintech technology companies must act responsibly to protect the rights and interests of their consumers.

Official Guo Wuping said fintech technology companies allowed people to go into excessive debt, causing “some low-income people and young people to fall into debt traps.” He described Ant’s Huabei virtual line of credit service as inclusive but not favorable, as some associated fees were higher than those charged by banks on credit cards. Ant declined to comment.

Other Chinese state media have also criticized fintech platforms for encouraging young people to spend excessively. Last month, a report from China’s central bank said the country is trying to increase domestic consumption without relying on consumer debt. Short-term loan default rates have been low, but officials are concerned about the risks that could arise if excessive debt is not reduced.

Ant, which is controlled by billionaire Jack Ma, is China’s largest provider of short-term online consumer loans. The owner of the popular payment app Alipay had the equivalent of $ 267 billion in outstanding consumer loans in June, which accounted for nearly one-fifth of China’s total short-term household debt.

The personal loan services of Huabei and Jiebei of Ant, which means “just spend” and “just borrow,” were used by about half a million Chinese citizens in the twelve months alone until June. Most of the funding has been provided by about 100 banks and other commercial lenders with which Ant has collaborated.

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

A few months ago, during Alibaba Group Holding Ltd.

The annual Singles Day online shopping festival, Ms. Wang said, used Huabei to dump items that included bottles of hot Moutai liquor, Lululemon yoga clothes, a Dyson hair dryer and a vacuum cleaner. “They just looked like bargains you shouldn’t miss,” he said.

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

Ant and his colleagues used to run ads that promoted liberal spending behavior. One of Huabei’s promoters, who showed up last October, featured a 37-year-old construction worker taking his daughter to an elegant restaurant for her birthday. Another showed a dealer that he 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 Ant has made changes to the way it lends. In December, the company said it had lowered credit limits for some younger borrowers to promote more rational spending habits, without providing details.

On Friday, Ant set a framework to self-regulate its various digital financing businesses. As part of that, the company said it would lend responsibly and would not extend loans to young, low-income borrowers beyond the amounts needed to cover their basic living expenses.

Yuzhang Wang, 26, said his credit limit in Huabei has recently been reduced to the equivalent of about $ 2,500, up 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 debts he had accumulated, including Huabei, in expenses such as Gucci and Versace accessories, iPhones and expensive dinners. He said debt collectors had called him and his family, threatening lawsuits.

Wang moved back to his hometown, where he juggles working in a factory, driving for a mountain company, and organizing wedding parties. He has also sold some online purchases. He has managed to reduce his debt by two-thirds.

Economists say they do not expect the decline in China’s online lending to severely dampen consumer spending, given its importance to the economy.

“Consumption is likely to be successful if online lending channels narrow and if Beijing prioritizes reducing short-term financial risks,” Aidan Yao, Asia’s emerging senior economist at AXA Investment Managers, said. However, he said Beijing wants to keep economic growth up and therefore would not severely limit consumption.

Katie Chen, director of Fitch, which covers China’s non-bank financial institutions, said regulators would not want to eliminate the entire online lending industry: “Rather, they want to make sure that online lenders don’t take excessive risks that may threaten the stability of the financial financing system “.

—Serena Ng contributed to this article.

Write to Xie Yu at [email protected]