A toxic brew of ballooning Asian household debt
Emerging market household debt as a percentage of gross domestic product has risen from 110 per cent in 2007 to 155 per cent last year, Invesco data shows
Asian household debt levels have surged thanks to monetary stimulus programmes designed to buttress economies from the worst of the 2007-2008 financial crisis.
Now that bill is coming due and it is leaving policy makers with a difficult question; how to cut debt levels and grow the economy?
Its a question to which there may be no easy answer. As US and European central bankers have discovered, a painful deleveraging process involving slow or negative growth as loans are paid down and debts written off, is often the only way.
“Slowing growth and slowing inflation and a big stock of debt...it creates a very toxic cocktail,” said Rob Waldner, chief strategist and head of global macro at US fund manager Invesco and who is underweight emerging markets.
Emerging market household debt as a percentage of gross domestic product has risen from 110 per cent in 2007 to 155 per cent last year, Invesco data shows, with domestic credit expanding between 40 and 50 per cent in China and South Korea. By comparison, over the same time frame, household debt has fallen in the US, and is now holding steady in Japan and the Eurozone.
Boosted by easier access to credit cards and consumer loans, consumer debt as a share of personal disposable income in now higher in Singapore, South Korean and Malaysia than it was in the US before the financial crisis, Deloitte economist Akrur Barua wrote in a report published this summer.
“The sharp economic downturn in the West forced Asian economies, especially export-driven ones, to turn to their domestic markets for growth. In addition to fiscal stimulus, policymakers unleashed monetary easing and increased sops for consumer spending,” Barua wrote.
In once export dependant Asian countries like China, policymakers and economists want consumption and services to increase as a percentage of total gross domestic product. That’s seen as a key part of any economic rebalancing. The problem is that rises in consumer prices, housing, and now also debt repayment costs, are outstripping wage growth in many regional economies, including Hong Kong.
The good news is that many central banks in Asia have room to cut rates, lowering borrowing costs while mitigating the risk of deflation which would otherwise make the debt repayment burden harder to bear - China alone has slashed rates six times in the past 12 months alone.
One outlier is Hong Kong, where interest rates will only go up in line with America, a result of the city’s currency peg with the US dollar.
As consumers deleverage others need to step up their spending to compensate.
“The standard steps is to lower interest rates, export your way out, and where the government is able to, step up spending, but all this kicks the can down the road,” said Rabobank financial markets research head Michael Every.
But unsustainable debt build ups are a structural problem within economies, Every said, and exporting your way out of a slump means both competitive currency devaluation and finding overseas markets with cash rich consumers, and neither is guaranteed to succeed.
Governments can also improve social security systems, reducing costs such as medical care, that can cripple household budgets, analysts say.
Citing the Euro zone and Japan, where successive central bank support measures helped kick start growth, Invesco’s Waldner says China’s central bank, the People’s Bank of China will have to further cut interest rates and shave several hundred basis points of bank reserve requirement ratios.
The Chinese yuan will also need to fall, Waldner says, predicting a further 10 per cent drop in the yuan value against the US dollar by 2016 year-end. That sounds a lot but on a real effective exchange rate basis the yuan is still strong against the greenback compared to other major currencies.