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Saturday, April 27, 2013

International Banks Lending to the Middle Class in Asia: Profit vs. Planet

In April 2013, debt levels in Asia were reaching record levels as international lenders were extending short-term loans to a growing middle class. Nonmortgage consumer credit in Asia outside of Japan had increased 67% from 2007 to reach $1.66 trillion by the end of 2012. This credit included credit cards and loans for cars, electronic products, and appliances. Outside of Japan, Asian car and motorcycle loans nearly doubled from 2007 to 2012, to reach a record $219.7 billion. Appliance and electronics loans also more than doubled, reaching a high of $10.9 billion. Meanwhile, credit-card loans grew by 90% to reach a record $234.1 billion, according to Euromonitor. The incentive for the banks is not difficult to fathom. By 2020, more than half of the world’s middle class is expected to be in Asia. That translates into more than 100 million more people per year. For the banks, this is an opportunity for growth that was not possible in the European Union or United States from the financial crisis of 2008 to at least well into 2013. Lest the debt-loads go to wherever the banks’ incentives lead, government regulators in China, Malaysia, and Indonesia began reining in mortgage, credit-card and auto/motorcycle lending. Interestingly, the European Commission was also working on regulatory proposals that would limit the incentives of mortgage servicers to produce too many “bubble-creating” mortgages. Two levels of concerns can be extracted from this trend in Asia. I contend that the more immediate concerns are crowding out attention that ought to be paid to the larger but longer-term problems.
One sort of concern posits that the international banks may have been providing too much credit to people entering the middle class. Such borrowers, similar to the sub-prime mortgage borrowers in California, Arizona and Florida, may not be able to handle their new debt-loads. At the beginning of 2013, debt levels relative to individual income in many Asian economies, including Malaysia, China, South Korea, Thailand, Indonesia and India, were up to 30% higher than in the United States. Citigroup’s claim that it was expanding its lending to the middle class in Asia in a “disciplined manner” should be considered in light of the financial growth incentives facing the bank, given the continued weak economies in Europe and North America. The fear that another debt melt-down might trigger another recession is sufficient to focus attention on whether the middle-class borrowers can handle their debt-loads. The baleful consequences that are larger and presumably further off get pushed aside, given the human mind’s preoccupation with today.
The upsurge in auto loans, for example, points to an expansive auto market in Asia. Sometime after 2000, the number of cars in use in China was doubling every year. Meanwhile, the Chinese were building an “interstate” highway system that would dwarf the network of highways in the contiguous United States. Loans enabling an exploding middle class to buy cars increase the global demand for oil, and thus can be expected to result in a higher price at the pump. Indeed, given the magnitude of the surge in projected use of fossil fuel in Asia, it may be that the Earth’s reserves of oil will be fully extracted earlier than expected, perhaps before alternative sources of energy are sufficient to pick up the slack.
                                                                   More people=More cars=More pollution    source: Businessweek
Furthermore, the increased carbon emissions that we can expect can be expected to facilitate global warming. To be sure, it can indeed be argued that the Asian middle class deserves the same freedom and ease provided by owning a car in the twenty-first century that the American and European middle-classes enjoyed in the twentieth century. However, the global climatic threat to the species had not been pressing during the industrial revolution and the ensuing consumerism of the twentieth century. Even though a person starting to smoke at 50 can point to a person starting at 20 and say, “I should be able to have my years of smoking too,” the person who smokes when old faces more health risks than the person who smokes when young because an older body is past its prime. Is it worth a heart attack to a 50 year-old to insist on the right to have five or six years of smoking too?  Similarly, the question of more oil for more cars, as well as more coal-sourced electricity powering electronics and appliances—all being facilitated by the upsurge in loans—can legitimately be answered differently when it is feared that the survival of the species itself hangs in the balance.

                                 As these diverging patterns demonstrate, the threat of over-population is not uniform across the globe.   source: fashionzombie.net
Therefore, taking Citigroup at its word that it is lending in Asia in a “disciplined manner” in spite of the rather unique opportunity for bank profit there, it can be asked whether international banks have a responsibility to society, and even the species itself, to help limit the additional cars put into use in Asia by resisting the temptation to extend more auto loans to the rising middle class. To such a bank, this might seem like muzzling the golden goose, particularly given the soft economies in North America and Europe. Hence, responsibility involves some voluntary restriction on a company’s financial self-interest. Duty is not meant to be convenient; otherwise, it would not operate as a tug on a banker’s conscience.
If corporate social responsibility is not strong enough—owning the forcefulness of the profit motive and the voluntary nature of responsibility—then government regulation may have to pick up the slack. But if industrialization and development is in the interest of the Chinese government, so as to mollify any potential political resistance from the people, the question may be whether the U.N. should be given the authority to construct and enforce international limits on carbon emissions. Put another way, will the absolutist interpretation of national sovereignty have to be compromised in order to the species to survive?  Problematically, the Chinese government holds that interpretation and so much of the increases in carbon emissions come from Chinese cities. There is the rub, one might say.
In conclusion, both corporate social responsibility and government regulation may be insufficient , together or separately, to protect humanity from the econo-climatic repercussions that must someday catch up with the massive growth in global population. The spread of capitalistic industrialization from the developed world to the Asian tigers (i.e., newly industrializing countries), whose strong governments could concentrate enough spending on the infrastructure needed for foreign direct investment by multinational corporations, has allowed the economic and climatic implications of 7 billion people to catch up.


Kathy Chu, “Consumer Loans Surge Across Asia,” The Wall Street Journal, April 22, 2013.