In China, Some Banks Shy Away From Letting Cards Max Out

In China, Reuters reports that banks have resisted “maxing” out their credit card business, eyeing consumer spending and the fact that credit card lending has become what the newswire calls a “risky supplement” to other loan activity.

And, perhaps in recognition of that risk, these same banks are pulling back on credit cards.

All told, banks based in the country issued 650 million credit cards in the third quarter of last year, which represents a significant gain from 450 million cards issued in the same period three years earlier. And balances have swelled to 6.6 trillion yuan, which equates to just under $1 trillion, up more than 120 percent over the same timeframe.

Citi research has noted some efforts to rein in cards, amid what Reuters depicted as the lures of low penetration, where the average Chinese citizen has “half” a card while in other countries, such as the United States, the average consumer can span several cards. Additionally, interest rates on Chinese cards are higher than corporate loans.

But nonetheless, consider the case where Shanghai Pudong Development Bank’s data has shown that credit card loans comprised 35 percent of new activity in 2017, and where that tally was “negative 5 percent” the next year.

Though seemingly anecdotal, at least in terms of banking activity – some banks are pulling back while others have been boosting lending efforts – other data offered by the Bank of International Settlements shows that in China, household credit was half of the GDP by the middle of 2018, which is up from 18 percent 10 years ago.

In another statistic, Fitch has estimated that household debt as a percentage of disposable income may be as much as 100 percent, which is about the 105 percent that has been seen in the United States. But the warning signs may be flashing, as China’s economic growth is slowing, and notably so, and borrowers may opt to default on card debt first among their liabilities. And as estimated by Citi, a three-point percentage rate boost in unemployment would mean that debt repayment ability – as measured by the analysis as part of a “budget” – would be trimmed by 1.2 trillion yuan, or 17 percent of total credit card balances.

Recovery rates can be a relatively low 16 percent on credit card debt, while those rates can touch 60 percent for corporate debt.