More trouble for China: households would rather save than spend

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Zhong Wei, who owns a car dealership outside China’s sprawling western city of Chengdu, isn’t very confident about the country’s economy.

“If housing prices and pensions continue to contract, I wonder what kind of security I will have in my 70s,” said Chung, 58.

An increasingly common belief is that China’s ailing economy, which is facing headwinds on a range of fronts – particularly its stable consumer sector – is now being hit even harder as households begin to pay down their huge debts.

This trend of deleveraging removes money from the productive sphere of consumption of goods and services and reallocates it to servicing debts, which are primarily in the form of mortgages and credit card bills.

There is a more troubling explanation for consumers’ reluctance to spend – and their increasing propensity to save even when they carry huge amounts of debt. Research shows that mistrust among citizens about their current financial conditions, and China’s broader economic plight, best explain this conservative consumer behaviour, at a time when Beijing desperately needs hordes of shoppers to reignite in its vast domestic market.

Good luck changing that, say most analysts, because the volatile real estate market is making people more nervous, and government efforts to boost consumption have been wrong and insufficient, when not simply absent. “Boosting consumption might be the best solution, but the government’s plans to do so don’t seem credible,” said Adam Wolf, emerging markets economist at Absolute Strategy Research.

The Chinese have reasons to save beyond the declining value of their homes, their main egg. China once revered the future of the pension system It’s getting muddier every year. The country’s rapidly aging population will soon 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 every year to keep up with the rising cost of living. But those increases have eased. In 2006, officials raised monthly pension benefits by 23.7%. After years of declines, this rate will reach 3.8% in 2023.

Despite these incentives to invest, the options available in China are lacking. The real estate sector is unstable, the stock market volatile, what many equity analysts call “irrational,” and emerging wealth management fields are struggling to mature.

For example, China’s $2.9 trillion trust industry in a growing problem. Partly as a result of increased government regulation, Goldman Sachs analysts said this week, the huge sector has been restructured six times since it was founded decades ago, and now faces losses that could reach $38 billion.

Meanwhile, Chinese household debt hit a new high of 63.5% of the country’s GDP in the second quarter, according to a report released last month by the National Corporation for Finance and Development. This is a small stepping stone away from the 65% red line set by the International Monetary Fund as a warning point of serious financial instability.

And while the lion’s share of that goes into mortgages, many Chinese spenders – especially young, low-income people – do so with little financial discipline, using a wealth of easy borrowing through Chinese fintech apps such as Ant’s Alipay. group,

Tencent
‘s

(700. Hong Kong)

wechat
,

And

Mitwan

(3690. Hong Kong). None of the credit lending companies responded Barron Comment request.

One profligate borrower, 27-year-old Angel Wu, who recently returned to Shanghai after completing a master’s degree in the UK, said she was representing her circle of friends. As she struggled to find a job — the unemployment rate for her age group is double digits — she was busy buying consumer goods on concessional credit, with the tap of her phone.

she gave Barron A video tour of recent purchases in her tiny apartment in China’s most expensive city. Last month, she bought nearly 70,000 yuan ($9,700) worth of retail goods, all on credit. Expensive items include clothes from her favorite store, Max Mara. (Woo showed Barron Screenshots of her purchases on each app, as well as her current debt accounts.)

Its other weaknesses are its expensive ballpoint pens. She recently bought a special edition Beatles pen that Montblanc sold for 7,000 yuan ($961), bringing her collection of luxury writing instruments to 10. Her other big purchases have been cosmetics and the ubiquitous food delivery service in China — “which It can add up quickly if she says, “I don’t buy a bowl of noodles every day.”

Apps offering these lines of credit often target younger Chinese and do not use Western-style controls to check their credibility for repayment. Interest rates are often exorbitant, and sometimes charged daily, rather than monthly.

In one app, my debt increased by about 65 yuan ($9) a day. “I will pay it when I get a job, although it will have increased by then,” she said. Barron.

Write to Editors@barrons.com