High time nation reduced its appetite for debt

Two recent announcements, both representing further uncharted financial territory for China, set off alarm bells for me.

In the first, we heard that a pilot consumer scheme that offers loans to low-income groups was being expanded. Private capital, domestic and foreign banking institutions and Internet companies are all being encouraged to set up consumer credit companies, and the approval procedures for these will be made easier, including no requirement for collateral. The administrative power to approve the new lenders and their approval procedures－previously controlled by the banking regulator－will be delegated to provincial governments.

The second revealed that credit card borrowing grew 35.5 percent during the first three months of the year and average credit lines jumped to 14,700 yuan ($2,400) from 12,300 yuan a year earlier.

With an estimated $7.8 trillion of deposits, thanks to rapid income growth, rises in home prices, and the country's traditionally high savings ratio, Chinese savers have more-than-enough private assets to absorb any reckless spending.

But the moot question is whether the government should be so eager to encourage more individual debt.

Economists tend to view debt as a practical means of getting money to where it is most needed, from those with an excess of it, to borrowers who are short of it.

The message in this case was loud and clear: "Get people spending, especially young affluent professionals, in this post-export, consumer-driven era".

Daily we read about the ongoing Chinese love-affair with Western consumer goods, especially by the burgeoning and youthful middle class. Many of them have already used years of savings to buy their first homes, backed up with contributions from family and even friends, and I can bet that many of them are leveraged to the hilt.

There are also many who are gambling on the very-Western－and ultimately ill-founded－belief that their salaries, their property values and their country's economy will keep on growing, and interest rates will stay consistent.

E-commerce giants such as Alibaba, JD.com and Suning have already launched installment services which give Chinese consumers largely unfettered access to loans to buy goods on their online shopping sites.

According to figures supplied recently by BNP Paribas, China's household debt was equivalent to just 23 percent of household financial assets and 10 percent of total Chinese financial assets in 2014.

However, in the context of a wider domestic economy which appears to be increasingly anxious about corporate and particularly government debt, I still cannot help thinking that pushing more consumer debt could lead to trouble if not controlled with an iron fist.

The line in the first announcement, of control over these new lenders being handed to－already debt-heavy, in most cases－local governments, alerted me most.

That is because the economic text books tell us very often it is not the debt that gets out of control in explosive credit booms, but the management of lending standards. Outstanding personal loans in China stood at 7.7 trillion yuan by the end of last year, according to the Boston Consulting Group, which expects them to race to 17.5 trillion yuan by 2018.

China's national balance sheet is still firmly in Beijing's favor, but economic history shows credit swings have moved in regular cycles of optimism and pessimism and there is no reason to think the nation is automatically immune to such seesaws.

If interest rates rise, economies slow, jobs are lost, and households and firms often respond by selling assets, spending less to repay debt, or simply default.

Here are three questions I would ask anyone in China considering loading their list of direct debts with consumer credit payments: How vulnerable are you? What might scupper your ability to pay? How is the wider economy performing?

Property prices and expanded mortgage lending have previously led many credit booms and busts. So here's a fourth: What is the property market looking like?

The Chinese government undoubtedly has some strong monetary tools available to contain any consumer debt crisis. But let us hope the West's addiction to this particular kind of excess never catches on here.