Jake's View

HKMA chief's household debt fears overblown

A clearer view of indebtedness reveals nothing to fret over, despite HKMA chief's alarmist talk

PUBLISHED : Tuesday, 07 May, 2013, 12:00am
UPDATED : Tuesday, 07 May, 2013, 3:56am

Soaring household debt and rampant consumer spending have put Hong Kong's economy at risk of overheating, the city's central bank boss said yesterday.

SCMP, May 4


Let's look at some specifics here; for instance, that bit about rampant consumer spending, which so concerns Norman Chan Tak-lam, the chief executive of the Hong Kong Monetary Authority.

He appears to base his concerns here on a statistic that private consumption has grown faster than gross domestic product since 2005. Indeed it has when one looks at the figures superficially. As the blue line on the first chart shows, the ratio of private consumption expenditure to GDP has risen from about 57 per cent in 2005 to about 65 per cent at present.

But what our man forgets is that almost a fifth of consumer spending in our domestic market is now attributable to tourists. If they later run into trouble because they have overspent, well, that could be bad news for consumer credit in Zhejiang or Jiangsu provinces.

Thus when calculating GDP, established practice is to deduct this tourist spending from the local consumer figures but add back what Hong Kong residents spend abroad. It not only makes sense in GDP but it gives you a better picture of whether local consumer activity is restrained or overheated.

The red line on the chart makes this adjustment. It shows that the ratio of consumer spending to GDP is pretty much what it was in 2005 and well down from earlier record highs.

Come on, Norman, get with the show. We don't expect howlers like this from the top man at the HKMA.

Likewise that bit about soaring household debt. Norman is worried because it has reached a record (just barely) 61 per cent of GDP.

Yes, and most other sectors of the economy also show record indebtedness as a ratio of GDP. After eight years of stagnation following the financial crisis in 1997, bank lending has doubled since 2005. If Norman is concerned about household debt, he must fret to know the ratio of non-household debt to GDP is 115 per cent, almost double his worry figure.

The second chart gives you a more telling perspective. Household debt now stands at about 35 per cent of total loans, down from 45 per cent 10 years ago. Overheated? Really?

This is a better way of looking at things, anyway, because measuring debt to GDP is like comparing apples to oranges. One is a balance sheet figure, the other a rough approximation of a funds outflow figure in a corporate cash flow statement. The two can be compared for amusement, but not for policy.

Norman's best, however, is that having presided over a 45 per cent slump in the Exchange Fund's investment income over the first quarter, he is now thinking of putting more of the fund's money into the Shanghai stock market. This one stands exactly where it did 12 years ago, although the economy on which it relies has quintupled in size. You spell this sort of performance as L-O-S-E-R.

Oh yes, Norman is worried about risk.