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TIANJIN, China—College student Liu Qikun recently went into debt to buy a $280 cellphone—and that is potentially good news for the unbalanced Chinese economy.
Ms. Liu, 22 years old, took out a loan in an electronics store from a kiosk run by Home Credit BV, a consumer-lending unit of Amsterdam-based investment company PPF Group NV. She agreed to pay monthly installments that would make her new hot-pink Lenovo A520 smartphone cost 23% more than the 1,782 yuan purchase price. But she figures she will pay off the loan quickly because her mother sends her 1,000 yuan a month—300 yuan more than her monthly living expenses—and she earns extra money tutoring math.
"I'm not worried. I'll be able to pay it off," Ms. Liu said.
 Laurie Burkitt/The Wall Street Journal
Consumption loans in China—including mortgages, advances on credit cards, and car and consumer loans—totaled 8.5 trillion yuan ($1.35 trillion) last year, up nearly 27% from 2010, according to data from Boston Consulting Group. Credit-card lending rose 81% to 813 billion yuan, while consumer loans rose 17% to 232 billion yuan. Meanwhile, the number of credit cards issued in China rose 24% last year to 285 million, according to the China Banking Association
Long a nation that preferred cash to credit cards, China is taking on an increasing amount of debt and opening its market to more lenders. That could help Beijing's push to develop a domestic consumer culture that can hedge its heavy reliance on public infrastructure projects—highways, bridges, and public housing—that have left its economy imbalanced and vulnerable to a sharp downturn if investment fades.
Raising household spending as a share of gross domestic product is crucial to achieving that objective. China's consumption by individuals accounts for a third of the country's GDP. Individual spending in the U.S., by contrast, is responsible for roughly two-thirds of GDP.
Financial industry participants say younger people these days are more willing to spend and to take on debt. Some banks are preparing for more debtors, installing software to catch delinquencies and processes that will help them judge the quality of customers, said a spokeswoman for the Asia-Pacific division of financial risk-management firm Fair Isaac Corp. FICO -2.21%
The balance of nonperforming personal loans in China jumped 18% in the first six months of 2012 from the six months earlier, partly because of defaults in personal consumer loans and on credit-card balances, according to data from PricewaterhouseCoopers.
The push to expand personal lending faces challenges in a country where concepts such as consumer databases and credit scoring are still catching on. China's economic slowdown also could hinder adoption.
Frankie Leung, a partner and director at Boston Consulting, said the 32 billion yuan that consumers took out in loans in 2011 was almost half the original amount forecast by the firm. Mr. Leung said that government expansion of consumer finance has been slower than expected. Mortgage lending also slowed, he said, adding that it likely affected loans for items tied to purchases for the home, such as washing machines and other appliances.
"We find that the young are still spending, but spending by other groups is slowing," Mr. Leung said.
To be sure, the development of consumer finance in China has a long way to go and accounts for only 15% of total loans, Mr. Leung said, noting that it won't be enough to meaningfully drive domestic consumption yet.
Since launching a pilot project in 2009 to test consumer financing in a handful of cities, regulators have been allowing four lenders to expand gradually to more cities and into retail locations, enabling them to set up kiosks at motorbike shops and established home-appliance chains. Participants so far include units of state-run Bank of China Ltd. 601988.SH -0.72% and midsize Bank of Beijing Co. 601169.SH -0.43% They also include Sichuan Jincheng Consumer Finance Ltd., a joint venture between Hong Leong Bank Bhd 5819.KU 0.00% . and Chinese lender Bank of Chengdu Co., and PPF Group's Home Credit. Chinese officials said in June that they would allow Hong Kong financial institutions to create consumer-finance divisions in southern Guangdong province.
![Description: [image]](chinas_people_clip_image003.jpg) Home Credit, which recently said it plans to invest more than €100 million ($129 million) over the next two years to expand loan operations in China and other countries in Asia, runs kiosks at 15,000 mom-and-pop shops and more than 9,000 retail stores, including outlets of China's largest home-appliance companies Suning Appliance Co. 002024.SZ -0.85% and Gome Electrical Appliances Holding Ltd. 0493.HK +6.98% Home Credit has faced challenges setting up in a country where established credit history is scarce, and where lenders may rely on little more than an electricity bill and bank-account transactions.
To figure out whether a consumer will be able to pay for loan on a computer or motorbike with interest rates of up to 35%, Home Credit looks at debt outstanding, employment and housing history. Applicants fill out a form on which they provide bank-account numbers and their government-provided health insurance cards. "If they move around too often, a loan isn't the right thing for them," said Michal Skocil, chief executive of Home Credit's China operations, adding that the average default rate is under 5%.
The delinquency rate, or rate of nonperforming loans, for all individual loans in China was 0.8% in 2011, down from 1.1% in 2010, according to the People's Bank of China.
Ms. Liu said she has had no problems paying off her first few months' payments on her smartphone and has been satisfied with the loan. The price of her phone, on the other hand, is giving her some buyers' remorse. It is now on sale for 400 yuan, or $64, less than the original price.
Issues:
- What is the advantage in having Chinese people go into debt to buy consumer goods?
- The article seems to provide contradictory evidence regarding the ability of Chinese to go into debt. On the one hand, we are told: "The balance of nonperforming personal loans in China jumped 18% in the first six months of 2012 from the six months earlier, partly because of defaults in personal consumer loans and on credit-card balances, according to data from PricewaterhouseCoopers." On the otherr hand, the author says: "The delinquency rate, or rate of nonperforming loans, for all individual loans in China was 0.8% in 2011, down from 1.1% in 2010, according to the People's Bank of China." Is there an inconsistency? If so, how would you resolve it?
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