China’s Generation Z Is Hooked on Credit

At one point in June last year, Zeng Jinpeng was more than 10,000 yuan ($1,500) in debt to a smartphone app.

The 23-year-old Shanghai resident pays for his online purchases of food, clothes, and travel with Huabei, a virtual credit card that’s part of Alibaba Group Holding Ltd.’s sprawling stable of e-commerce properties. His spending often used to exceed his only source of income: the 8,000-yuan monthly allowance from his parents. He tried to repay the debt in installments, even borrowing from Jiebei, another Alibaba-owned credit service, but eventually his mother and father had to bail him out.

Zeng’s story is typical of members of China’s Generation Z. These fledgling consumers, born from the mid-1990s to the early 2000s, have little income and therefore virtually no credit history. Yet they have easy access to credit from an assortment of banks, fintech startups, and peer-to-peer lenders, plus other channels that are unregulated. Formal household borrowing rose to 54% of gross domestic product in the first quarter, up more than 4 percentage points in a year. China’s ratio is still lower than that of the U.S. (66%), Hong Kong (72%), or South Korea (100%), according to S&P Global. Nevertheless, the rapid increase is worrying regulators and analysts. In mid-July, Fitch Ratings noted that periods of debt-fueled consumption “can often be followed by sharp market corrections.”

The spending habits of the young in particular are causing concern. Late last year, former People’s Bank of China Governor Zhou Xiaochuan said that in some cases the younger generation is being induced to overconsume via credit secured through technology. According to a note the Shanghai University of Finance and Economics released in July, there could be consequences for the broader economy if debt piles up to the point where it “starts to erode household liquidity and crowd out demand,” meaning repayments take up so much disposable income that there’s little left for new purchases.

China is in the midst of a long-term shift from an export- and investment-led growth model toward something more like a modern consumer economy. A consumer debt crisis would throw that strategy off track at a time when production for export is constrained by the trade war.

Unsecured consumer lending has expanded 20% a year in China since 2008, and intensifying competition is pushing financial institutions to chase less creditworthy borrowers such as Zeng. Huabei charges him 0.05% per day, for an annualized rate of 18.25%. The service offers revolving lines of credit from 500 to 50,000 yuan. Balances can be repaid in monthly installments. Alibaba’s rivals, including JD.com Inc., have similar products.

Unlike credit card debt, loans offered on these platforms are mostly uncounted in official data. Consulting firm IResearch projects the amount of consumer finance available through the internet will more than double, to 19 trillion yuan, by 2021, from 7.8 trillion yuan last year.

Regulators last year launched a crackdown on peer-to-peer lending, which besides being a source of easy credit had also become a popular investment vehicle. The sector has shrunk to less than half its peak size as a result of forced shutdowns. Official data showed that almost 70% of China’s 50 million P2P investors were younger than 40.

As for Zeng, he’s trying to be a little more frugal, even though he now earns a small income from an internship in Shanghai. “I deliberately set the credit limit at a lower level,” he says, “so that hopefully I can better match my income with spending.” —With Jun Luo, Miao Han, Wendy Hu

©2019 Bloomberg L.P.