FEATURE: Thrift-conscious Chinese taught to spend, spend, spend

Asian Economic News, June 11, 2001

BEIJING, June 6 Kyodo

For centuries, Chinese have clung to the wisdom of saving for a rainy day. In the early decades of the People's Republic of China, it was even considered a patriotic act.

But now Chinese are being encouraged to spend and to keep on spending - even if it means going into debt.

The government wants the people to forego saving to maintain and even accelerate the high economic growth rates of recent years, support struggling domestic manufacturers and reduce the mountain of money in banks, which can't find enough corporate clients to lend to.

After seven interest rate cuts since the late 1990s and a dramatic rise in consumer credit, there are signs that, in the big cities at least, growing numbers are ready to shed past frugal habits.

The borrowing patterns of Beijing residents, for example, are rapidly changing as banks become more competitive in offering a variety of loan packages.

Housing credit to individuals is growing in popularity in the city. An estimated 17.6 billion yuan ($2.13 billion) was given out in individual home loans last year, for example, as the government's policy switches away from the work-related housing at heavily subsidized rents to commercial sales.

The Beijing branch of the China Construction Bank, which began issuing home loans two years ago, said 8% of debtors applied for loans larger than 1 million yuan, 22% for loans of 50,000 to 1 million yuan, and 15% for loans of 30,000 to 50,000 yuan.

The bank has also seen rapid development of automobile, tourism, educational and durable commodities loans -- all concepts that were unknown a decade ago.

Personal mortgages from the four major state banks reached 213 billion yuan in the first six months of last year, an increase of 45% from the end of 1999, with loans for education up 65% to 41.1 billion yuan, according to official figures.

In the first four months of last year, personal loans other than mortgages -- for cars, holidays, weddings, medical treatment and education -- rose by 900 million yuan, exceeding the rise for all of 1999.

There are several factors involved, some psychological and others economic. For a start, people of previous generations were never sure when disaster might strike and thus sought to have something hidden under the bed to tide over hard times.

Two decades of high economic growth have convinced mainlanders that their future is relatively secure, so they can take more risks.

Apart from seven interest rate cuts, the government now imposes a 20% tax on the interest earned from bank deposits. A new policy also requires depositors to use their real names for accounts, making it harder to hide from the tax man.

Another factor is that Chinese now have more time off and want to spend their money on leisure pursuits.

For example, the May Day holiday has been turned into a seven-day official break. Last year, 46 million people left their homes and spent 18.1 billion yuan on trips. Initial data for this year, suggests a significant increase in both figures.

At the same time, the government has ordered the banks to relax conditions for obtaining personal credit.

From this year, for example, the Industrial and Commercial Bank in Shanghai has stopped querying customers on how they intend to use consumer loans, which are now granted mainly on the basis of a single interview.

A spokesman for Beijing's biggest car market said that previously it was hard to borrow from a bank to buy a car. ''There were strict conditions and only certain makes were eligible, excluding imported cars. Now you can borrow to buy any kind of car.''

''The procedures are simpler. Still, it is only a minority, about 10%, who use a loan. The rest pay cash,'' he said.

Changing spending patterns are also encouraging the emergence of credit cards -- in contrast with the previously prevalent debit cards, where users have to deposit money in a bank and then draw on it using the cards.

In this regard, Xiong Anping, vice president of Visa International (Asia-Pacific), believes foreign banks operating in China will focus more on credit cards than on debit cards and will dominate their Chinese competitors in the sector.

Xiong made the predictions when discussing the foreign-domestic competition likely to arise following China's accession to the World Trade Organization.

But he also said that foreign banks entering the China market as a result of WTO membership would enjoy few advantages concerning participating merchants and might even find themselves in a disadvantageous position for a considerable period of time.

He said foreign banks would ''naturally'' lack competitiveness in the debit card sector because it appeals to Chinese with savings.

Compared to debit cards, credit cards are still in their infancy in China.

Because Chinese do not have complete credit histories, domestic banks have delayed offering credit cards to avoid the resulting risk. But, a few have begun to dip their toes in the water and it seems inevitable more will follow.