Card-Carrying Revolutionaries

China wants its people to buy more on credit

Twenty years ago, China's government routinely extolled the virtues of the model worker who performed heroic feats on the factory floor. Today, Beijing is more likely to laud the model borrower: someone willing to fearlessly pile on debt for a piece of the Chinese Dream. Yao Lan certainly qualifies. A 26-year-old assistant at the Russian news agency Interfax, Yao bought a new, $40,000 apartment right out of college with a 20-year mortgage at 5.58% from the China Construction Bank. Does she mind having big debts at such a young age? Yao doesn't bat an eyelash: "Where could I find so much money in such a short time without a loan? Definitely, it's a good investment."

As Beijing sees it, the more Yao Lans there are, the better. For decades, state spending kept the economy going. Millions worked for companies making clunky products hardly anyone wanted. People bought food and paid minimal rent, but, apart from such boring essentials as refrigerators and rice cookers, they didn't have the cash to load up on consumer goods. Instead, people saved, in the frugal Chinese tradition. Like Japan and Korea before it, China capitalized on that miserliness, forcing consumers to put their money in low-interest bank accounts, money the government used to make loans to unprofitable steel and cement factories.

Now, with that model soundly discredited and the economy slowing, Beijing is trying a new tack. China's economic planners are hoping to unleash decades of pent-up consumer demand for houses, cars, and smaller purchases funded by bank loans. Beijing hopes that if it can get people spending furiously, it can make them the new engine for China's growth. Consumers account for about half of China's GDP, compared to two-thirds in most developed economies. "For every yuan the government can get the consumer to spend boosting GDP, that's one less yuan it has to spend," says HSBC economist David Seto.

The government has tried a variety of strategems to get the penurious Chinese in a mood to borrow and buy. One was the creation of three weeklong holidays, a radical departure from the dreary socialist past, when people were lucky to get seven days off a year. The idea was that they'd spend the time shopping, using credit in the process. Seven interest-rate cuts since May, 1996, have taken deposit rates to 2.75%. That, plus substantial pay hikes for civil servants and a new 20% tax on interest income, has made it more attractive for people to spend than save. It's a whole new mindset for China. "This is another way of financing the boom," says Andy Xie, Morgan Stanley Dean Witter & Co.'s chief economist for Asia-Pacific.

NEW HOME LOANS. The plan worked well, until recently. Consumer loans at the Industrial & Commercial Bank of China, one of the nation's four largest lenders, surged from $725 million in 1997 to $20.5 billion in 2000, but will be off substantially from that level this year. Housing loans are also way up. For all of China's banks, new home loans grew from $16.4 billion at the end of 1999 to $40.8 billion in 2000, representing 79% of all new consumer loans, though they, too, are off this year. Credit-card use is rising. China Construction Bank had 3.9 million credit cards outstanding at the end of 1998 and 4.2 million at the end of 2000. One result: Retail sales grew 10.1% in the first eight months of this year. Anecdotal evidence suggests that defaults are on the upswing too, but neither Chinese banks nor the central bank will release that data.

Car loans also are considered a major credit opportunity--though they have dropped in recent months while shoppers wait for post-World Trade Organization bargains. "The auto market has a lot of potential," says Xu Maochang, editor of state-owned Liberation Daily's Auto Weekly, whose car advertising has doubled in the last year. General Motors Corp., for one, plans to start lending money to car buyers as soon as WTO-related reforms allow. Young professionals are "absolutely" ready to use credit, says Scott Reno, director of GM's China financial services division.

One problem is that China lacks a sound system to assess creditworthiness. Banks such as ICBC are just beginning to adopt internationally recognized credit evaluation procedures. Too much lending without such a system could be a "disaster," says Tang Min, chief economist at the Asian Development Bank's mission in China. GM's Reno pronounces himself "not overly concerned." When it begins making loans, the auto maker plans to verify income, employment, and other particulars, though it expects to have some duds.

Given their limited recourse against deadbeats, Chinese banks seem almost too eager to lend. For example, they can't evict a nonpaying mortgagee. In early November, the nation's central bank issued a directive urging banks to lend only for explicit purposes, such as buying a car or a house. That's because customers were borrowing money to play the stock market.

Judging from the crowds at the 10th Annual Shanghai Consumer Goods Fair earlier this month, many Chinese are in a buying mood. Chen Yong, a 56-year-old teacher, and his 43-year-old wife, Fang Fang, a factory worker, spent 90 minutes on jammed public transportation to check out the exhibit, which featured treasures large and small-- from model apartments to Miss Kitty gifts. The couple, who were shopping for housewares, borrowed to buy their apartment and, like many of their compatriots, are less shy about going into debt to upgrade their lifestyle. Predicts Bob Zhang, senior economist at BNP Prime Peregrine: "In the next five years, consumer credit will increase by 30% a year." Caught between a looming slump and the failed policies of the past, Beijing needs Zhang to be right.

By Alysha Webb in Shanghai

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