In a Wall Street Journal article this week, the perils of debt-supported spending by Chinese Gen Z-ers and millennials were contrasted with the potential benefits of a hyper-charged consumer economy. The upshot from a macro-economic perspective is that while some amount of borrowing can be good for an economy (leading to job creation and more productivity), it can also lead to unhealthy levels of household debt, which in turn can lead to an overall economic slowdown.
Many economists have opined that China’s growing economy may very well require a consumption machine (like we have in here the US–lots of people buying lots of “stuff”) to continue mature, and “now they have one” in the Gen Z and millennial cohorts. The younger generations in China have been going into debt at a rapid pace over the past decade. And they are fueling their consumption by borrowing, often using fintech apps for peer-to-peer lending and micro-loans to help provide short-term cash. Instead of using these funds for things like houses and continued education, the Chinese Gen Z-ers and millennials are spending it on hobbies, gadgets, clothing, and entertainment. It appears that saving money is now out of fashion–something odd and quaint that their parents and grandparents did. When asked what she had saved over the past three years of working, one 25-year old was quoted as replying to her parents: “I’m sorry, probably nothing. All my friends are like this. We have no savings and we don’t really care about it.”
So how did China’s Gen Z and millennial generations get here? The authors cite a generational shift in spending attitudes, and we’ll focus on two sources of that shift here. First, China’s older generations were described as being “frugal savers — a product of their years growing up in a turbulent economy with a weak social safety net.” The preceding generations were cautious in their spending because of economic uncertainty. But now, the Chinese who were born between 1990 and 2009 have an economic safety net in the form of these same frugal parents and grandparents. This has apparently led to viewing saving as something less than important because they have economic outpatient care to fall back on. These younger generations (perhaps wrongly) believe that they don’t need to consider the long-term consequences of borrowing money to spend while also not saving for the future. (Footnote: We suspect that we’re seeing here a by-product of the violation of one of the rules of The Millionaire Next Door: never tell your children you’re wealthy.)
Second, spending attitudes are being influenced more and more by what we see on social media, and this is most likely part of the fuel in China just as it is technology-enabled generations around the world. Facebook, Instagram, Twitter, and the rest are serving as a “new neighborhood” where our network’s new purchases, vacations, and recommended services are ever-present. As we’ve discussed in posts before, social media is serving as a non-stop way to compare what you’re doing, driving, and wearing to others. It appears that borrowing-to-spend behavior is also being driven by the comparison game in China. The apps and other tools that provide micro-loans and peer to peer lending no doubt have made this easier, and have utilized social media to make this seem like a sound financial practice.
When it comes to how we spend, the people around us (either literally or virtually) matter, especially if we’re easily influenced by others. Sociometrics, the measurement of how our social status compares to others, has demonstrated the power of influence in spending to achieve a certain level of status in relation to our neighbors. As an example, this is why home purchases play a significant role in dictating our future spending. Consider this from Stop Acting Rich:
We take our consumption cues from our neighbors. . . . most of the self-made millionaires I have studied have one thing in common: They were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth.
Not only do houses have very specific and determinable financial costs (e.g., a down payment, monthly mortgage and insurance costs), but there can also be a significant and less-than-visible (at least initially) impact in spending to keep up with our under-accumulating status-conscious friends next door. In fact, the ability to ignore the spending behaviors of neighbors, friends, and co-workers is one of the best predictors of building and sustaining wealth. We call this social indifference and define it as the ability to ignore social influences on spending and a general disinterest in consumer trends. It is a combination of attitude, behavior, and personality that predicts financial success (as measured by net worth) no matter how old you are or your income level. Understanding how others influence our spending behaviors is one of the first steps in aligning our spending with our financial goals.
From an economic perspective, having a large base of consumers may very well fuel China’s economy and lead to growth. Economists also warn that it could lead to a slowdown if the household debt to gross domestic product (GDP) ratio continues to increase. But the individual personal consequences for the younger Chinese generations of spending beyond their means could eventually lead to disastrous results, potentially similar to those witnessed in the US during the Great Recession when low (or non-existent) savings rates combined with economic contraction to create a whole lot of financial carnage, both individually and institutionally. Spending without considering what tomorrow may bring is a dangerous mindset for any generation, the consequences of which are often not felt until the economy is in the tank.