“Life would be unimaginable without credit,” said the 27-year-old dance instructor in Beijing, who bought the car [an $88,000 BMW 530Li] in January. “I don’t see why I can’t spend future money if I can make the monthly payments.”
Anyone paying attention to economics realizes that the situation in China is of utmost importance to the world economy. China is now manufacturer to the world (supplier) and importer extraordinaire of luxury goods (customer) from the West. Major changes in China are sure to impact the rest of us at some point.
And so with this in mind I was reading this Bloomberg article - China Auto Financing Tripling By 2017 - when I came across the dozzie of a quote shown above.
I think I see a pattern developing ... and it does not usually (or ever) end well.
It seems China has come an awfully long way. Just 30 years ago when I first went to China, hotels had one black and white TV per floor, everyone rode bicycles, and food was a heaping bowl of rocky rice (small stones in it) with maybe a few veggies or a scrap of meat. Now we have 27 year old dance instructors buying $88,000 BMWs on credit. We have come a long way baby - not so much a Long March as a 50 meter dash.
But I want to start this story in the west, though at about the same time (the 80's). It was a period of economic stagnation, high inflation and low growth (stagflation). One of the ways that we got out of that funk was by using more credit. Remember that was the time of Reagan's "deficits don't matter" comment.
Deficits and credit are in some ways wonderful things. You get to have what you want today and not have to pay for it until some later time. In effect it pulls economic activity forward, so that we can live higher today, with a price to be paid tomorrow. But if we borrow more tomorrow then we can live better than yesterday and only have to pay the day after tomorrow. Now we can actually continue to do that as long as the bill does not come due. We live better each day (year), but have a bigger and bigger bill at some point in the future. That really is the story of the economic boom and collapse which peaked with people borrowing from their houses as if they were ATMs. Eventually they ran out of places to borrow from, and lenders ran out of borrowers to lend to (sub prime homeowners being the last).
Enter China. In China most folks still pay cash. Yes there has been a real estate boom with stupid house prices, ghost cities and all kinds of insanity ... but most houses were bought with small or non-existent mortgages. Part of this is a culture of thrift, the other part though is because banks pay lousy deposit rates and people don 't trust the banks anyway. Better to have a solid investment (real estate).
But China now is facing an economic slowdown. Its banks are lending at unbelievable rates (though mostly to state owned enterprises or for real estate developers and the like). The only real frontier left is ... you guessed it ... the consumer.
If China can get its consumers hooked on credit then it can keep the growth train chugging along for a little while longer ... or so they hope. That is why the dance instructor buying a $88,000 BMW is so interesting ... and so scary.
And it looks like ground zero in the credit explosion will be the auto sector (lots of jobs).
“The next five years will be the golden era for China’s auto financing business,” said Cao He, an analyst with Minzu in Beijing.
“We have recently seen a strong increase in young customers,” Rick Livingood, general manager of GMAC-SAIC, said in an e-mail. “The post-80s generation, which tends to be more open to credit consumption and has a certain auto purchasing power, has gradually entered employment.”
To cater to growing ranks of those buyers, GMAC-SAIC offers loans with low initial monthly installments that increase over time.
(think teaser rates or ARMs)
China has one of the most unbalanced economies in history. It is heavily weighted to capital spending (think factories, construction and infrastructure) with a very small consumer sector. With the capital spending side now slowing (you only need so many empty factories) it is time for the consumer to step up ... but with consumers either without a lot of money (low wages) or with money tied up in real estate, the only obvious route open is .... CREDIT!
What better way to pump the economy than by giving credit to folks to buy cars and keep the car factories humming.
So it looks like the Chinese economy is not ready to roll over just yet ... though it now seems like the world has finally reached its final bottle of adrenaline for growth. Is there anywhere else left??
Note: In case some think that there is nothing wrong with Chinese taking out loans to buy cars ... I agree ... except that I have seen that when you bring in major changes very quickly you almost always run into big problems later on. Better to have organic slow growth to adrenaline shots. Making mass market credit available to a society not really used to it is asking for trouble. I'd be interested to see how the dance instructor is making out in three years time.