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Posts: 2531

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Q: Are a lot of Chinese living on credit and bank loans these days?

I have been in China for over eight years and I have noticed a few patterns that don't follow logic (well this is China): 

 

1) Buying a foreign car in China can be up to 2-4x the price of back home. And there are maybe 10-15x the number of cars around than 8 years ago. 

 

2) Many Chinese own 2-3 apartments. And the prices are about 2-3x they were 8 years ago.

 

3) Many Chinese are buying things like iPhones, Gucci, LV and other stuff. People wouldn't even look at this stuff 8 years ago because they simply couldn't afford it. 

 

While, I am sure some Chinese are becoming legitimately rich, I am sure most don't earn much more than they did eight years ago. Yet, the top three have become a very common occurrence where I am. However, most of these people only make about 2000-4000 RMB. If you do the math, it is quite impossible for people on that salary to afford the things they are buying. 

 

Maybe the money is passed down through family but, even then... it wouldn't be close to enough. Have the banks made it easier for Chinese people to get loans? Are China going to go through a horrific financial crisis when they realize most of these people can't pay the loans off? 

 

Are your Chinese family/friends living off tons of debt? 

 

 

9 years 5 weeks ago in  Money & Banking - China

 
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There was a report a few years back, I don't have the link any more, that stated that people in Shanghai were living 375% beyond their means.

 

People are definitely leveraging their payoffs from developers to reinvest in properties that won't sell (do a search for the ghost town in Inner Mongolia and you'll find the story of a guy who sold his property then reinvested his payoff in the exact same developer who bought his property and now he's flat broke).

 

The days of living frugally and collectively are long gone. Face is everything and the concept of saving for a rainy day seem forgotten.

laowaigentleman:

Yes, but so many people in the west all have this stereotype of the old Chinese miser with a million yuan in the bank.

 

Seriously, this is the prevailing view.

 

There's an enormous dissonance (or should that be disparity) between what foreigners think of China from outside and what actually happens in here.

 

For example, my own mother said to me, when my Chinese university mate returned to China, that he would struggle to re-assimilate given all the drinking and karaoke he'd been doing in NZ.

 

How can I illustrate this better? It isn't possible.

9 years 5 weeks ago
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This Spring Festival really got me to thinking about it because I saw so many cars that seemed decently expensive. I am talking at least 100 - 300k RMB+. 

 

I just started thinking about the average salary in these parts and thought... wow... these cars are like 2-4x the price back home but most people here make like 10-30% of the income. And then houses.... 

 

So I asked my wife's brother how they can afford it and he said that about 80-90% of all Chinese are now "house" and "car" slaves. 

 

Has the demand for houses and cars to get married perpetuated this trend

To me it sounds like the government is making it way too easy to grant people loans. Maybe so it keeps people happy and they don't revolt or something but later it is going to be a massive catastrophe. 

laowaigentleman:

I would assume that the source of the loans is from the grey market, not the actual banks.

 

The reason for this is that the Chinese banking system is designed to service large state owned companies and they simply aren't set up to cater to the demand for credit from smaller enterprises and households.

 

This is one thing that genuinely scares me. My friend has recently gotten married and he's set up a business, borrowing 200,000rmb to lease an office.

 

I think the grey market lenders are lured into a false sense of security by the hukou system. They're likely overextending themselves by lending to people who aren't credit worthy due to their belief that they'll always be able to find a debtor. Considering that there's no proper record of people's debts, it's likely that people are taking out loans to service existing ones.

 

Throw face into the mix and you've got yourself a scary situation if the property prices keep dropping.

9 years 5 weeks ago
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Robk:

@LWG - So then these "grey markets" are who exactly? Loan sharks, private creditors or something? 

 

I can see how they would think that if they give someone a loan, that said person can't leave (due to the Hukou system or something). But that system is changing slowly as my wife actually helped a woman change her Hukou with some trouble but not too much. 

 

If this catches on that people can simply run-off on loans by easily relocating... It will cause a very rough blow back as many of the people who got a loan may be called in on them immediately. Loans will be further restricted and the real estate market will suffer even further. 

 

 

 

 

9 years 5 weeks ago
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laowaigentleman:

I think they are mostly traders who charge very high rates of interest. I heard many of them charge something like 30% per annum.

 

I don't know a lot about loan sharks here, but I would never go to one. I heard they cut people's fingers off and their rates are astronomical.

 

With rates so high and so many people willing to take on the debts regardless, the greed of these guys will end up being their undoing.

 

The rates are high because the risk of default is high, but all they can see are the dollar signs so I'm sure they don't check carefully. Optimism bias is what lead to all of this in the first place.

 

I'm proud to be cynical and pessimistic at times, but I've made a resolution.

9 years 5 weeks ago
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Eorthisio:

Robk -> The grey market is more commonly known as the shadow banking system, most Chinese got the money to buy their house/car or start their company through them. If you default they have very little legal means to get their money back but they can still hire thugs to push you to sell your car or whatever else and pay them back. Funnily enough recently there has been protest from borrowers to ask for more transparency from the lenders because in many cases they don't even divulge their name to avoid future consequences, if that was the case probably none of them would have got their loan.

9 years 5 weeks ago
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laowaigentleman:

@eothosio

 

Lenders in the grey market don't even get the names of the people they loan to???

9 years 5 weeks ago
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There was a report a few years back, I don't have the link any more, that stated that people in Shanghai were living 375% beyond their means.

 

People are definitely leveraging their payoffs from developers to reinvest in properties that won't sell (do a search for the ghost town in Inner Mongolia and you'll find the story of a guy who sold his property then reinvested his payoff in the exact same developer who bought his property and now he's flat broke).

 

The days of living frugally and collectively are long gone. Face is everything and the concept of saving for a rainy day seem forgotten.

laowaigentleman:

Yes, but so many people in the west all have this stereotype of the old Chinese miser with a million yuan in the bank.

 

Seriously, this is the prevailing view.

 

There's an enormous dissonance (or should that be disparity) between what foreigners think of China from outside and what actually happens in here.

 

For example, my own mother said to me, when my Chinese university mate returned to China, that he would struggle to re-assimilate given all the drinking and karaoke he'd been doing in NZ.

 

How can I illustrate this better? It isn't possible.

9 years 5 weeks ago
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borrowing money is very easy in china. my mortgage was mainly financed by loans from a village bank, and relatives. you may have noticed that a lot of rich chinese are lazy and uneducated, with lots of rapidly inflating money in the bank. lending beats doing nothing with your money. it usually beats doing something with your money yourself, if your brightest idea is a hamfisted copy of something else that *appears* profitable. unfortunately, the people who take the loans don't have much common sense among them either. it usually involves getting lots of face-gain from a flashy business/purchase, and they only start thinking about feasability once most of the monet is spent on making sure that the imaginary people in their heads stop laughing at them and start to acknowledge how great they are.

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I'm in my wife's village. I see my share of expensive SUVs in an otherwise bleak place, and I hear my share of people who owns 5 houses.

* At least around here, thanks to huge infrastructure projects, lots of people got their old crappy house destroyed . They got several less crappy houses and cash as compensation. They reinvested their cash into more houses in the midst of the bubble.

* For one successful guy in the big town, you have 20 of his relatives living crappy lives in crappy countryside on the way to become suburbs. It's in Jiangsu, imagine this in Shanxi, Hunan, Guizhou, etc .

* Shadow banking, where companies which core business is not banking (say, chemistry, construction, etc) indulge into banking for cronies.

* Beware the stories you hear around you. Those people wearing fancy clothes in the Porsche SUV might live in a home with bare concrete floor and wall.

laowaigentleman:

Does the local government offer cash and a new house as compensation to the families which reside in the old homes they smash?

 

How are the valuations done? Is there a procedure or is it done by executive fiat?

 

Whenever I'm talking about this topic, I'm always assuming. I've only got anecdotes to go on, and I suppose this is the case with all of us here. My girlfriend's parent's house is about to be demolished and they've heard nothing about a new place or even a figure to compensate them.

9 years 5 weeks ago
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Scandinavian:

The going rate is not fixed. In Zhuhai the typical price is that you get a new apartment that is slightly bigger than the craphole you loose. So you can go from living in a really bad 50sq/mtr apartment to living in a brand new 80sq/mtr apartment that thanks to Chinese building quality will remain uncrappy for up to 3 years. 

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A couple extra points.

All of these extra cars you are noticing might not be owned by them. I have noticed a strange phenomenon at this time of year where people lend out all unused cars to people. Wether its because they flew home and cant use them or they had more than one car. Last year my friend was rolling around in an Audi Q7. Which was odd because he has a car. He just wanted an upgrade for a week? This year another friend who doesnt have a car is now driving a golf. I have heard this countless times from workmates friends ect. Could be a reason why.

2: As your city is a 4th/5th tier it must have countless people who leave for work/ higher pay. They are all home now.Many drove to show off their new rides. Look for red cloth things hanging from the mirrors. These people can also legitimately buy numerous apartments. Its sooo much lower where you are. My factory has many poor workers. All own homes. They live in squalor in SZ then take it back to their pooh town where they are a boss.

Take it from me, its the lazy people, mortaging their futures for Ipads. The real laborers have tooo many responsibilities for that shit. They rarely have a beer on weekends. Its all family back home.

Also you have the office workers in cities who can never buy a place in say Shanghai but a place where you live? Not much of an issue at all.

Lastly you have the people who seem kind of rich. These people prop up whole generations of family members.

One example: the wife has this friend from Hunan. Hes married to this American guy. Hes nice enough, and not too wierd but not my type. Kinda lazy, doesnt really care whats happening around him. Wife can do everything. You know the type.
Well we know the Yank has no money. And she wasnt working. Yet her Uncle paid downpayment for a house in Foshan for them. They just needed a few K per month fkr mortgage. Then the uncle bought them that small ford SUV. First payment. Uncle also payed for their wedding. Which was super poop by the way. And way too crappy and cheap to believe someone paid for it. Anyways i met this famous uncle..... He was driving a 2002 Camry! He wasnt rich at all! He just had a pretty good job and was chosen as the one to prop up the rest of the family. 100K for a first payment for a house here, 40K down payment for car here, bam , on to the next.

One dude with a reasonable salary in a top city could feasably keep paying unlimited down payments in the 4th tier city. Then 7 people live in it and pay off the mortgage.

Robk:

Yeah that sounds about right. I think a lot of them did rent cars for the week to prop up their status in their villages. 

 

I also noticed that when we got to my wife's village there was about double or triple the number of cars as last year. Yet these nice cars are sitting next to medieval stone fortress houses lol. It clashes so bad... but that's how they do things. 

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Ha...It is hilarous to buy a car based on 2000-4000rmb.I even won't consider buying a car even I make much more on that.Most adult Chinese aren't independant,they always live by the help from parents.I am not surprised the parents use their savings to buy a car to their son.
The adult children becomes more and more selfish.They did not actually take good care of their old parents.Thanks god to the spoiling education.I often see 80 years old people collecting rubbish in the street.Or the old parents live in a very old crappy house while the married son and daughter living in their new house.
In the spring festival,people gave lots of money to the children as gifts.But not a lot of people gave money to their old parents.
China has a tradition to take good care of old parents.Where can I find the tradition now?It becomes rare now.

laowaigentleman:

When it all turns to shit, as it inevitably will, you'll be able to grab your old parents a second hand BMW or Mercedes and buy them a house by the sea if all these people are pulling in to take on board 100,000+ yuan loans is 2000 to 4000 yuan a month. Don't buy an Audi though. Those things have lost their lustre after I've seen so many cashed up peasants (both foreign and Chinese) driving them

 

Look on the bright side angel

9 years 5 weeks ago
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Strawberry66:

Lol.I will only buy the car I can afford without taking a loan or asking my parents for help.Pay just by cash. When I buy something,I always buy what I can afford. I am trying to be rich by business now.If I make lots,I might pay cash to buy a house directly somewhete I like^^

9 years 5 weeks ago
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laowaigentleman:

Do you think that puts you into a minority demographic? Almost all of my Chinese friends are heavily in debt due to their need to impress someone.

 

It sure isn't me. I live a spartan lifestyle and my salary is three times what there's is, I travel by bicycle and bus and I've no mortgage to pay.

9 years 5 weeks ago
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Strawberry66:

I do not try to impress anyone.I have managed my finance well so far.I told my Dad I won't buy him luxury ring now, instead I buy him less expensive new year gift.And I start saving 100rmb monthly for giving to my parents and will increase it when my business goes better.Now I use most of my savings to pursue my dreams and I have a five years plan.I have a stable job pays fine in Shanghai while starting my own business at the same time.I have good insurances covered in China too. I always believe an adult should try to make money by himself/herself and live a life they can afford or won't take long time to pay back even if taking a loan.If someone live by the help from parents all the time then he/she's suck. I did not buy car,but I saved more for my dreams.Plus car is useless in city.I took subway in Shanghai,I took fast train to come back to hometown.I took taxi sometimes.I take plane if I go somewhere further. I think I am diffrent from most Chinese.I have no dept nor living by the parents.

9 years 5 weeks ago
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Robk:

You know... that is very true. 

 

There was an old couple I think staying in an apartment for a while (undecorated) in my building. They are a VERY nice old couple and very happy. Their son or grandson... not sure which... got married and they GAVE UP their home for the boy and his wife. Do you know where they live now? 

 

In the basement... yup... in the small storage area that came with buying the apartment. They live down there. It makes me so sad everytime I see them... because they are still so happy and nice. How could their son do that to them? 

9 years 5 weeks ago
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Strawberry66:

Robk,I saw this a lot.Always the children live better than the parents do.They are selfish bastard.It made me so sad to see it too.The parents gave them life and made great scarifice for them(That's the reason I always forgave my parents when sometimes they are being so unreasonable and hurt my feeling,but I know they still love me). I saw the way Chinese people spoiling their children,it should be one of the main reason that they treat old parents so bad because they have been turned into the selfish bastard.

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It feels eerily similar to the US in 2006-2007.

 

I never worked in finance, but my feeling is that the lenders aren't considering that the high rates of interest they're charging are set to insure against the risk of default by their borrowers. I've heard the figure of 30% and higher quoted. This means that one in three of their borrowers is going to fail to pay them back.

 

Knowing the herd mentality of a lot of Chinese (my own Chinese friends always say things will be ok because "a lot of people are doing it"), I'm sure they're only focussing on the 30% return rather than the 30% default rate.

 

Couple this with the fact that there's no central database listing credit defaults let alone a credit rating system and you've got a potential disaster on your hands.

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I have heard some good answers and I think it is a combination of quite a few. Mainly I think these three are pretty much dead on:

 

- Parents and Grandparents pretty much sacrificing everything so that they children can drive nice cars and gain them face this Spring Festival 

 

- People are renting nice cars to try and impress the neighbours

 

- People are taking out huge loans from Shadow Banks

 

---

 

All of these reasons are more or less negative and will leads to negative results. 

laowaigentleman:

A leading business mogul in NZ said during the 2008 financial crisis that he thought of recessions as natural purges.

 

They cleanse the markets of people who lack the rational capacity to hold their place in them.

 

I've seen far more irrational behaviour here than rational.

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I saw an edition on what seems to be the Chinese version of 20/20 with Barbara Walters.  The particular program I watched was about public middle and high schools which were deep into debt because the government issued ordinances for schools to have to meet certain size requirements or something.  Anyway a few towns in Jiangsu built schools way bigger than what they needed, and the money was all financed through loans of course.  The odd thing is that the principal got the teachers to gurantee/ cosign the loan.  Every now and then new loans were taken out in order to pay for the old ones. The inevitable happened and now those teachers are having to pay  back those loans.  Crazy stuff and you gotta wonder where the common sense is sometimes. Don't ever sign anything you don't completely agree to!

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One aspect of shadow banking:

 

Anyone with no credentials and nothing to show for can get a loan from local mafias. The interests are usually very high but the requirements are obviously next to nothing and there is - obviously - some level of flexibility.

Usually they come with a legit company location and a front office in some shitty building on the edge of any city, but people who sign for this know the deal.

I'm sure they are also open to middle investments with deals on various levels, this being China you are always dealing on a grey zone anyway.

 

Another remark:

Notice how nowadays people on the street are pushing people to sign for credit card? Same when you enter a bank. They do seem desperate to sell this or that package and this is really not a good sign.

 

I think this is hard to draw conclusions from the cars you see on the streets. We all know to what extremes people will go to get some face. As far as we know those cars could be rented or borrowed. Or they could be eating noodle soup all year long.

 

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