JUST a few years ago, the Chinese Government was still worrying about how to discourage frugality and encourage Chinese people to spend more.

A recent research, however, found that pre-spending and over-spending in some cities in China has expanded so quickly that the debt/income ratios of families have surpassed even those in the United States, which is known as the "teacher" of Chinese when it comes to spending future income.

The study conducted by Liu Jianchang, a researcher with the Chinese Academy of Social Sciences, found that in Shanghai, the debt/income ratio has reached 155 per cent, meaning if a family's monthly income is

1,000 yuan (US$121), its debt to the bank would be 1,550 yuan (US$187). In Beijing, the ratio has hit 122 per cent. Both are higher than the figure for US families, which stood at around 115 per cent in 2003.

The majority of family debts are for houses and cars, according to Liu's report.

Although some experts have doubts about the method used by Liu to compute the figures, there is one point they all agree on - ever more urbanites in China are becoming debtors after succumbing to the temptations of pre-spending.

Statistics show that loan taken for individual consumption exceeded 1.7 trillion yuan (US$204 billion) by June last year, about 20 times more than the 1998 figure, when China's banks first started to extend personal loans to individuals.

Excessive debts

"A reasonable debt/income ratio can stimulate the economy, but excessive debts will surely become great burdens to any family," said economist Wang Yuanhong.

"Instead of enjoying a better life, such families only see a decrease in their living standards due to debt-related pressures."

Seeing eye-to-eye with Wang, Zhu Ronglin, a professor at Shanghai Jiaotong University, said that any economic activity should be based on the status quo of the country.

"China is still a developing country. Although growth has been fast in recent years, China is still far from being a wealthy country," Zhu said.

"But the current situation is that many Chinese people are taking more loans than their much wealthier Western counterparts, although their ability to repay is weaker. That brews up certain risks for the national economy, especially as China's personal credit system still has a lot of flaws."

Credit system at risk

Currently, the appraisals carried out by banks on the credit status of loan seekers is not very strict, with banks vying with each other for more business, said Sheng Zhengde, a local economist and deputy to Shanghai Municipal People's Congress.

Unlike the practice in many other countries, which use tax returns as an important way to appraise individual income, in China, income status is verified by the employer and is easily fabricated, Sheng said.

There are already reports of banks bringing debtors who fail to pay back loans to court, and according to business insiders, more cases of this kind will be seen in the coming years.

"An urgent task now is to quicken the pace of the construction of a personal credit system, which already lags far behind the growth of pre-spending," Zhu said.

"Banks should also exercise stricter controls over their loans."

House loans boom

Most young couples in China's cities have started to purchase houses using loans. These loans make up the major part of borrowing for personal consumption.

The abolition of the old house allocation policy, rising real-estate prices and the strong desire of young people to move out of their parents' homes and live on their own have led to an unprecedented boom in the loan market.

"The experience of buying houses with loans, which isn't unusual with most young people in cities, has taught people about pre-spending. And so long as they accept the concept, they will practise it more," Sheng said, adding that the number of credit cards owned by Shanghainese is growing quickly.

"Blind spending and over spending has now become a new problem among Chinese, while just 10 years ago, we were still worrying about how to get people to spend more," Sheng said.