More trouble for China: Households would rather save than spend

Zhong Weiyi, who owns a car dealership just outside the sprawling western city of Chengdu in China, is not very optimistic about the country’s economy.

“If house prices and pensions continue to fall, I wonder what security I will have in my 70s,” said Zhong, 58.

China’s flagging economy, which is facing headwinds on several fronts – particularly in the sluggish consumer sector – is increasingly expected to be hit even harder as households begin to pay off their sizable debts.

This deleveraging trend takes money away from the productive sphere of consumption of goods and services and reallocates it to servicing debt, which is mostly in the form of mortgages and credit card bills.

There’s a more worrying explanation for consumers’ reluctance to spend – and their increased propensity to save, even when they’re heavily in debt. Research shows that citizens’ lack of confidence in their current financial health and China’s overall economic woes may better explain this conservative consumer behavior at a time when Beijing desperately needs droves of shoppers to boost activity in its vast domestic market.

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Good luck changing that, most analysts say, because a shaky housing market only makes people more nervous and the government’s efforts to boost consumption are misguided and inadequate, if not simply absent. “Increasing consumption may be the best solution, but the government’s plans don’t seem credible,” said Adam Wolfe, emerging market economist at Absolute Strategy Research.

Chinese have reasons to save beyond the declining value of their homes, which are their most important nest egg. The future of China’s once-respectable pension system is becoming more unclear every year. The country’s rapidly aging population will soon be unable to support 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 fallen. In 2006, civil servants increased the monthly pension allowance by 23.7%. After years of decline, this rate reached 3.8% in 2023.

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Despite these investment incentives, there is a lack of options in China. The real estate sector is unstable, the stock market is volatile and what many equity analysts call “irrational,” and emerging wealth management areas are struggling to mature.

China’s $2.9 trillion trust industry, for example, is increasingly struggling. Partly due to increased government regulation, the huge sector has been restructured six times since its inception decades ago and is now facing losses of a potential $38 billion, Goldman Sachs analysts said this week.

Meanwhile, China’s household debt hit a new high of 63.5% of the country’s GDP in the second quarter, according to a report by the National Institution for Finance and Development last month. That’s just a fraction off the 65 percent red line, which the International Monetary Fund uses as a warning point for serious financial instability.

While mortgages account for the lion’s share of this, many Chinese spenders – particularly young people on lower incomes – do so with little financial discipline, using a range of easy loans via Chinese fintech apps such as Ant Group’s Alipay or Tencent (700 .Hong Kong) WeChat and Meituan

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(3690.Hong Kong). None of the credit institutions replied Barrons Please comment.

One prodigal borrower, Angel Wu, a 27-year-old who recently returned to Shanghai after completing her master’s degree in the UK, said she was a representative of her circle of friends. While she’s struggling to find a job — the unemployment rate is in the double digits for her age group — she’s been busy buying consumer goods on credit just by tapping her phone.

she gave Barrons a video tour of recent purchases in her tiny studio apartment in China’s most expensive city. In the last month, she has bought nearly 70,000 yuan (US$9,700) worth of retail goods, all on credit. High-priced items include clothing from her favorite store, Max Mara. (Wu showed Barrons Screenshots of their purchases in each app, as well as their current debt accounts.)

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Their other weak point are high-priced fountain pens. She recently bought a special edition Beatles pen sold by Montblanc for 7,000 yuan ($961), expanding her luxury writing instrument collection to 10 pieces. Her other big purchases included cosmetics and China’s ubiquitous mail-order grocery — “which can add up quickly, if you will.” “I don’t buy a bowl of noodles every day,” she said.

The apps that offer these lines of credit are often aimed at younger Chinese and do not check their repayment credibility according to the Western model. Interest rates are often exorbitant and are sometimes calculated daily rather than monthly.

“With an app, my debt grows by about 65 yuan (US$9) a day. I’ll pay it off when I get a job, even though by then it’ll have grown,” she said Barrons.

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Robert Wilson

Business & economics analyst. Breaking down intricate financial trends for informed decision-making.

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