Look at global economics from a moral point of view, and it’s a story of virtue rewarded. Growth in the West, fueled by easy credit and consumption, collapsed in the 2008 financial crisis. Growth in the East, by contrast, fueled by saving and production, has held steady. But look more carefully, and the reality is that Asia’s legendary culture of saving, while not quite a myth, is fast declining in many places.
The culture of Western-style consumer credit is spreading rapidly across emerging markets, nowhere faster than in Asia. It turns out that many of the habits of Asia’s burgeoning middle classes, living in increasingly affluent cities, aren’t all that different from those of their peers in the West. With the help of banks eager to expand their business, tens of millions of consumers all across the emerging markets are picking up home mortgages, credit cards, and auto loans. For every village grandmother living frugally and putting aside some of the family money, there is at least a grandchild (or three) living in a city, striving to keep up with the evolving consumer needs in a fast-changing Asian city. It is a generation that has discovered the pleasures of “spending before they earn,” abetted by easy plastic money, says Hong Kong City University economist Li Kui-wai.
So much for centuries-old taboos on debt. When easy credit is offered, it is usually taken, regardless of traditions or values, says Carmen Reinhart, a University of Maryland economist. In South Korea, all it took was a bout of financial-sector deregulation since 2008 for private debt to snowball to 150 percent of annual disposable income, a number that would make even some Western nations blush. Malaysia, another Asian tiger economy whose leaders have often lectured the West about Asian values of thrift, even has its own festering credit crisis. The Southeast Asian nation has one of the region’s highest levels of personal credit, now at 77 percent of GDP. While more than half that debt is from home mortgages and car loans, the substantial rest is credit-card debt and other consumer finance. In Hong Kong, the average outstanding credit-card balance is now higher than in Western Europe. Binge shopping beyond one’s means is certainly no Western prerogative.
If all that doesn’t sound familiar, how about this: the Bank of International Settlements warned as early as 2008 that the growing credit boom in Asia and other emerging markets poses “new risks to financial stability.” Eventually, BIS economists Ma Guonan and Tae Soo Kang warn, excessive indebtedness will lead to rising credit cost, contracting credit, instability in the financial system, and damages to the broader economy.
But as long as they can avoid that outcome, all this shopping and spending—even if it’s on credit—is very good news for the global economy. Instead of trying to boost their sagging exports, Asians need to grow their own consumption in order to balance their economic growth and help get the West out of its slump and back into a buying mood. China, for instance, the locomotive for all of Asia’s growth, urgently needs to raise its consumption share of GDP; that’s the only way to compensate for the drop-off in sales to the West. In fact, Chinese consumption as a percentage of GDP has actually declined in the past decade, from 46 percent in 2000 to 36 percent in 2009. And, says Peking University economics professor Michael Pettis, “unless domestic consumption expands dramatically, China can continue growing rapidly only by increasing investment well beyond what is economically useful or by forcing larger trade surpluses onto a reluctant world.” So to rebalance the world economy, the question is not whether Asians are spending too much, but whether their spending is growing fast enough. So it’s very good news if they’re spending, and if they need credit to do it, fine.
By Western standards, Asia’s cash reserves are still massive. Ever since Asia emerged from the economic uncertainty of its last financial crisis in 1997, people and governments have been stashing away large chunks of their incomes for the proverbial rainy day. Now China ranks as one of the world’s biggest savers, at a national rate of 38 percent of GDP. India boasts about 35 percent of GDP in savings. That’s nearly 10 times spendthrift America’s 3.9 percent. But these numbers, too, are deceiving. Dig a little deeper, and it’s the bank accounts of export companies, rather than thrifty Chinese and Indian households, that account for the bulk of those holdings.
Undaunted by the fallout of the 2008 credit crisis in the West, local and Western banks are doing their best to reverse this culture of thrift across emerging markets all over the world. And they have a point: unlike the stagnant West, emerging markets are growing, people’s incomes are rising, and credit is seen as an expression of confidence. The basic pattern across the world’s fastest-growing economies is that governments are more focused on the fruits of credit-driven growth than on the dangers of easy credit. Malaysia is a prime example. In 1998 borrowing by individuals accounted for only 25 percent of debt in that country, while today the figure has grown to more than half, fueled in part by personal credit habits. In Turkey, too, the number of credit cards in circulation grew from 15.7 million to 47.7 million, more than one per household, between 2002 and 2009. In Russia, the volume of consumer credit has been growing by 1 to 2 percent every month since last May, and now the country’s total consumer credit is $180 billion—20 percent of GDP, and a 5.4 percent jump above the previous year. “Credit is a positive tendency for Russia’s economy,” says Ivan Lebedev, vice president of VTB24 Bank.
Massive marketing campaigns are helping to drive the boom. China UnionPay, the biggest card issuer in the People’s Republic, has been buying up advertising billboards across Hong Kong in a bid to double the number of cards in circulation there from 3 million in early 2009 to more than 6 million by the end of 2010. In Turkey, too, credit-card advertising dominates the urban landscape—and it works. Turks borrowed nearly $100 billion in 2009 on plastic, a staggering 7 percent of GDP, at interest rates as high as 42 percent. Up to 15 percent of Asia’s household debt is now from credit cards. The bottom line for emerging markets is that credit drives growth. Take Brazil, which was long famous for its misshapen social pyramid: a huge underclass at the broad base, a small elite at the pinnacle, and a wafer-thin middle class in between. But thanks in part to more widespread access to credit, Brazil’s social geometry has undergone a radical makeover over the past decade. As the economy stabilized and then began to boom, some 27 million people have climbed out of poverty since 2000. By 2009 the middle class was officially the nation’s largest social class for the first time in Brazil’s history. Those millions of emerging consumers have gone to town with their pent-up demand, turning the heads of merchants, banks, and industries.
Recent census data showed that 69 percent of the Brazilian middle class own their own homes; 22 percent are car owners; 89 percent have mobile phones; half own computers (and fully 34 percent of that number have broadband connections); and all have TVs. Much of this acquisitive fever is nurtured by credit. Banks and credit agencies project that 628 million credit cards will be issued by the end of 2010, an 11 percent increase over 2009. Half of the new plastic (49 percent) is in the hands of low-income and middle-class customers, and with the economy projected to grow by 5 percent a year for the next five years, the number of credit cards will likely double by 2020. Even among the 40 percent of Brazilians who still have no bank accounts, many use credit cards.
It’s anybody’s guess how long the emerging markets’ credit boom can go on. In Brazil, for instance, consumer credit has been growing by 17 percent a year, and is expected to reach $360 billion in 2011. In a survey of 30 banks last summer, the Brazilian Banking Federation found retail credit growing at a 21 percent clip, nearly three times the rate of the overall economy. It’s the same story in Hong Kong, where the PrimeCredit analysis group reported in the summer of 2010 that 70 percent of local cardholders had carried over the bulk of their balances—almost twice as many as the average of supposedly profligate U.S. debtors. Another 2010 study found that roughly 10 percent of South Koreans 15 or older were three months late on personal debt payments. In August 2010, India’s SKS Microfinance raised $350 million in fresh capital—and its stock crashed two months later when news broke that it was having difficulty collecting on its microloans.
Still, there are signs that Asia has learned from past mistakes, including a string of credit-issuer bankruptcies in Taiwan, Hong Kong, and South Korea between 2001 and 2005. Since then, some of the industry’s worst excesses have been curbed. In some countries, credit rules have been tightened and credit-card marketing has been regulated in an effort to control consumer splurging. Asian banks tend to be tougher lenders than American ones—for example, they haven’t targeted poor people with offers of “subprime” mortgages. Most card companies in Asia require relatively high minimum incomes, plus payment of at least 10 percent of the card’s balance each month, meaning that the average Asian consumer can’t even get a card.
Before the 2008 crash, much of the world believed that credit fuels healthy consumption, and that government debts would eventually be erased painlessly by sheer growth. The meltdown has shattered many of those beliefs. So far, emerging-nation growth is still strong and savings are high. The question now is whether Asian banks and consumers are courting disaster by imitating the practices that got the West into so much trouble.
With Anna Nemtsova in Moscow, Mac Margolis in Brazil, and William Underhill in London