Commentary on Political Economy

Wednesday, 7 April 2021


Broke and In Debt, China's Gen Z Adjusts to Life Without Easy Credit

Bloomberg News
  • Few places for indebted students to turn as services shuttered
  • Online loan curbs part of wider government fintech crackdown

China’s 36 million university students are starting to learn what it’s like to live without easy credit.

Last month authorities effectively shuttered student access to the once ubiquitous online loan industry, a sprawling collection of apps, fintechs and other unregulated lenders. Internet platforms were told to stop offering online loans to students and unwind existing credit. Banks will need to seek regulatory approval before promoting such loans on campus.

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The crackdown is both part of a wider regulatory push to curb the entire fintech sector and a response to specific abuses by lenders targeting college students.

Historically there were next to no affordability checks on short-term loans to students, where annualized rates are typically between 15% and 24%. Over the last few years, local Chinese media have reported a series of shocking incidents related to the sector from debt collection by way of intimidation to even victims being forced into the sex trade to pay off debts.

Yet the sudden withdrawal of credit is leaving those already indebted with few places to turn.

Despite taking on two more part-time jobs, Rachel Chen, a 21-year-old undergraduate in Sichuan province, still doesn’t know how she’ll pay off her nearly 50,000 yuan ($7,630) of online loans.

“I used to borrow from one platform to repay loans at another to avoid defaults but now I can’t borrow more,” said Chen. “I had to tell my parents, but they would only help with half of my debt so I have to figure out a way for the rest.”

Chen currently makes 2,000 yuan a month from her three part-time jobs, while her monthly repayments are about 5,000 yuan.

Even for those who aren’t still at school the latest crackdown and the possibility of more restrictions on internet loans to come is adding to the pressure on other young Chinese already suffering the consequences of historic easy credit.

Zhang Chunzi, a 25-year-old who works at a foreign trade company in Hangzhou, still has 150,000 yuan of loans outstanding from a dozen platforms including Ant Group Co.’s Jiebei service.

Zhang, who lost her job in February last year due to the pandemic and only just found a new job in June, makes a monthly 6,000 yuan after-tax.

“I get calls and text messages from debt collectors almost every day,” Zhang said. Nearly all of her attempts to negotiate lower interest payments have been rejected and collection staff have even called her new employer. “It’s very scary.”

She’s not alone in feeling trapped. Even before the new restrictions, which follow-on from the 2018 crackdown on peer-to-peer lending, support groups for debt-laden young Chinese borrowers were ballooning on social media.

The nearly 41,000-member strong “Debtors’ Alliance” on user-review platform Douban, for example, saw its membership more than double amid the pandemic. Here young Chinese share tips ranging from how to deal with debt collectors’ intimidating calls, to how to soothe their anxiety and guilt.

There’s also plenty of regret about why they incurred the debt.

Generation Z -- those born from about 1996 to 2010 -- grew up in an era of rapid economic expansion with high expectations of future fat salaries. Compared to both their overseas peers and previous Chinese generations they are more optimistic, impulsive and likely to outspend their budgets, according to McKinsey & Co. research.

They are also much targeted by marketeers as the next likely engine of domestic consumption growth.

Easy credit once promoted everywhere from social networking tools to e-commerce platforms helped bridge the gap between the type of life they want to lead and what they can afford now. Chen, for example, spent most of her loan money on medical cosmetology items like Botox shots, as well as cosmetics and clothing.

China's Impulsive Gen Z

Young Chinese are more likely to consume spontaneously than peers

Source: McKinsey & Co. 2019 survey of 2,947 consumers

Because they operated below the regulatory radar it’s difficult to gauge exactly how much is owed to these various online platforms. Best estimates are that there are over 7,000 micro lenders, nearly twice the number of traditional banks.

“Fintech is another form of shadow banking and, as such, regulators and economic authorities are adamant it needs to be reined in,” Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, said. “It will affect mostly the young generation, which hardly has savings.”

For the already indebted like Zhang and Chen there isn’t an obvious way out. High interest rates mean their regular repayments aren’t making much of a dent in their debt. Mainstream banks will only touch those with good credit records and proof of income.

Formal bankruptcy isn’t really an option either. There is no nationwide procedure to declare yourself bankrupt in China, with only cities like Shenzhen and Wenzhou offering any sort of organized process.

That leaves the nation’s over-extended young having to deal on an individual basis with lenders.

“It’s a very worrying situation,” Shen Meng, a director at Beijing-based boutique investment bank Chanson & Co said. He’s concerned about the risk of people turning to underground channels for illegal loans and get caught in a downward spiral. “Many people will find it hard to get themselves out of trouble.”

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