According to Shanghai Daily, consumer debt is rolling out to middle and low-income earners in China and in my opinion this will just leave innocent people slaughtered by easy credit.
Imagine living in a country where easy credit has never been available and then having your first taste of it. It will be like doing meth for the first time and being an instant addict. The thrill of easy credit actually has some of the same brain chemistry responses, just without the acne and bad teeth.
"Private capital, foreign and domestic banks and Internet companies will be allowed to set up "consumer credit" firms, which can extend small loans to the public for their retail purchases, the State Council, China's cabinet, said on Wednesday."
I wonder how Bank of America China is going to go over. Hopefully Capital One doesn't translate into something bad you do with a duck and a goose. According to Google, 第一资本 actually translates back into english as First Capital. Oops.
Forecasters say the Chinese appetite for consumer credit will grow 20 percent per year.
"Compared to traditional loans offered by banks, loans designed specifically to fund retail purchases are generally small and without the need of guarantees. Such loans are especially handy for people who are either denied of credit cards by banks or whose cards have low credit lines," said Wang Qisheng, chairman of Suning's consumer credit arm.
And why do you think they were denied credit? I'm going to go with excessive risk of default.
As a consumer debt expert I can see what the byproduct of this kind of type of rampant credit access is going to be. It's interesting that there appears to be little to no emphasis in passing out useless financial literacy classes before the meth gets loaded up for distribution. But then again I do have to give props to China for having teens who scored at the top of the charts on the Organization for Economic Cooperation and Development's financial literacy test. Damn overachievers. American teens ranked ninth.
But then again, a U.S. college graduate just told me the other day, "they are garnishing my wages for way more than I can afford. I make about $1,000 a check they want to take 15% out of each check that's 30% a month." [Insert head slap.]
As one U.S. client told me in the past, "Shopping is my heroin and my credit card is the needle." While that might be not quite what is reported to about to happen in China, you can imagine the emotional draw to consumption with easier access to sub-prime credit.
This will be interesting to watch since China has no real process to deal with overwhelming consumer debt and no personal bankruptcy system, yet. They probably will develop a personal bankruptcy system once consumption slows to due to over-indebtedness. It's a lesson we learned in America, centuries ago.
China already has a suicide issue over debt problems. "By official estimates, as many as 280,000 Chinese kill themselves each year, twice the rate in the United States, says a 2008 LA Times article.
But non-government statistics find the suicide rate in China among women is the second highest in the world. And my own studies show women are more likely to suffer emotional trauma from debt than men.
The LA Times article is about the "Bridge of Death", Nanjing Bridge, in China where desperate people jump but a kind man tries his best to save them.
"I told him to go away, it's none of your business," said Shi Xiqing, recalling the day Chen saved his life. Shi, 43, who collects recyclables for a living, was deep in debt after borrowing $15,000 to pay for his teenage daughter's leukemia treatment. When he couldn't make the loan payments, the debt collectors grew abusive, even chasing him down the street and slapping him in front of his friends.
"I couldn't handle it anymore," said Shi, now a close friend of his savior. "I went to the bridge because it's convenient -- a few seconds, it'll all be over."
Most people Chen helps don't want to stay in touch. But Shi was different. He liked how Chen would never say no to handing over yet another small loan to tide him over, or to taking him out to a local dive for the occasional bottle of cheap liquor. Chen never tired of telling him that everything was going to be OK.
"This bridge needs people like him," Shi said. "Without him, I would not be here today."
And while some make the argument consumer bankruptcy can't simply be transplanted into China, the argument can also be made that easy credit is going to create a hell of a mess and a process to deal with that should be rolled out at the same time.
And one day in China someone will do the research and find out the same thing we've learned in America, "Those That File Bankruptcy Do Better Than Those That Don't."
Hey, maybe we can give people a misfortune cookie with every new line of credit that is soon to be issued in China.
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