In China more and more people are taking out personal loans by the minute. This has become a problem, which now needs to be addressed, especially since it critically affects monetary policies.
By this past September, China’s annual domestic currency lending was up to 3.36 trillion RMB, with personal loans at 1.06 trillion and corporate loans at 2.3 trillion. Personal loans accounted for 31.5% of total loans as opposed to 19% in 2006 or 611 billion of the total 3.18 trillion borrowed. The amount of loans given out to corporations has therefore declined.
The dramatic increase should be attributed to the real estate and stock market boom as well to a fresh and hyperactive credit card market. Obviously, there are a lot of people playing the markets in China and many are borrowing to do so. With real estate a hot commodity, mortgage loans account for the majority of loans and the People’s Bank of China, the country’s central bank , is now concerned that the ever-increasing interest rates will cause defaults. According to a report by the Central bank, China’s home mortgages are skyrocketing and with them the risk of defaulted payment. As real estate prices fluctuate, the number of bad loans in commercial banks will increase. The report further states that over the previous three quarters, home mortgage balance was 2.86 trillion, up by 592 billion from the beginning of the year. That means its has grown by 31.4%.
Increasing interest rates by the US Federal Reserve was a major factor in bringing about the crash in the US housing market. If China’s central bank is worried about a similar situation happening over here, it must be more cautious with interest rate adjustments.
The sharp increase in personal loans is also going to restructure lending as a whole in China: A large majority used to be given to corporations but now, with personal loans are gaining on total percentage there’s not enough to go around. Regardless, this restructuring could prove beneficial. Lending to individuals is considered better quality credit and will help improve the asset quality of Chinese commercial banks.
Chinese financial regulators, however, have yet to recognize the potential advantages lending a larger share of the pie to the public and have thus far this year rather focused on controlling lending in order to prevent economic overheating.
Meanwhile, given the limited grow of credit, banks have been trying for some time to restrain corporate loans and develop a personal loan business in order not to surpass the total amount of credit allocated by the monetary authority. But this also poses the danger of having insufficient credit to support the real economy.
Take Zhejiang Province (a wealthy province in China) as an example. All together, Zhejiang companies needed to borrow about 150 billion as working capital for the second half of the year. But in reality less than 100 billion was available on credit from local banks.
At this point, the government either needs to harness in the amount of personal loans or allow free reign on the total amount of lending if they plan to take care of corporate as well as the growing needs of individuals.
Indeed, the structure of lending in China’s bank system is changing and the rigid way of imposing cap and allocating the amount of loans by government seems to be obsolete.