The article discusses how Chinese citizens are misusing cheap consumer loans by prepaying mortgages or investing in stocks instead of buying goods, thereby undermining Beijing’s push for a consumer-led economic recovery.
Some borrowers are taking advantage of the low interest rates to prepay mortgages or invest in stocks instead of buying goods. The practice, which is banned by regulators, risks undermining Beijing’s attempt to engineer an economic recovery tied to consumption as the nation tries to regain its footing after years of stringent Covid Zero policies.
Consumer confidence in China has taken a hit in the wake of Covid, with outstanding short-term consumer credit plunging from its peak at the end of 2019. In contrast, households have amassed a huge pile of savings.
The mortgage prepayment rush, which began last year, has gained momentum as Beijing struggles to restore confidence in the slumping property sector.
Citigroup Inc. analyst Judy Zhang estimated Chinese homeowners likely prepaid 4.68 trillion yuan worth of mortgages in 2022. The cheap rates on consumer and business loans may also trigger some people to borrow large amounts to repay mortgages, she said.
China’s banking regulator last month asked lenders to beef up oversight of the usage of personal loans and to make it clear to borrowers they’ll be held accountable by law if they breach contracts by misusing the funds for other purposes. Penalties for borrowers include early collection of loans or suspension of credit.
Authorities have in recent years stepped up efforts to crack down on the misuse of bank loans and have penalized lenders for failing to prevent such practices. The banking regulator fined some of the nation’s largest banks a combined 12.2 million yuan in September last year, for violations including their failure in checking personal business loans and consumer loans that led to misuse of the funds in the property market.
However, the bigger issue lies in whether China can motivate its people to spend, as the exploiting of consumer credit funds reflects a pessimistic view toward the economy’s prospects.
“People will only be willing to consume when the economy really begins to pick up with wages growing steadily,” said a director of investment bank Chanson & Co.
