China’s household debt creeps upward, approaching warning line of International Monetary Fund
- Excessive levels of indebtedness and slow income growth among Chinese residents are constraining consumption, but China’s Politburo is hoping domestic demand will boost economy
- Given the debt stress, residents appear more likely to use their savings to pay off loans and reduce asset risks than to consume and invest
Chinese households have reported rising indebtedness while still trying to shake off the ghosts of uncertainties in jobs and incomes, contributing to the nation’s economic slowdown and raising questions about whether Beijing’s new consumption push can actually loosen up shoppers’ purse strings.
Analysts appear more worried about consumers’ genuine spending ability, as their income growth has lagged behind economic expansion and they become more inclined to save for mortgage payments, utility bills, childrearing and their own uncertain future.
The nation’s household debt reached 63.5 per cent of the national gross domestic product (GDP) in the second quarter, up from 61.9 per cent at the end of last year, according to a report by the National Institution for Finance and Development (NIFD) issued on July 23.
It is getting closer to the 65 per cent red line previously used by the International Monetary Fund as a warning point about financial risks.
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China’s household debt is mainly in the form of mortgage loans, which reached 38.6 trillion yuan (US$5.38 trillion) by the end of June; as well as consumer goods loans, credit card debt, private borrowings, and loans used to fund business operations.
“The effective demand for both household consumption and investment fell,” wrote Zhang Xiaojing and Liu Lei, two researchers with the Beijing-based think tank.
Zhang is also a government adviser heading the Institute of Finance and Banking at the Chinese Academy of Social Sciences.
“The weak household spending was mainly owing to their slow growth of income and eventually the slow economic growth,” they said.
China has seen a fast rise in its household leverage ratio since 2008, when Beijing’s policymakers launched a 4-trillion-yuan stimulus package and monetary loosening to counter the financial crisis.
The end-2008 leverage ratio was only 17.9 per cent.
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The Bank for International Settlements estimated that the debt of Chinese households reached US$10.76 trillion by the end of last year, or 61.3 per cent of its economic output.
This has already surpassed 55.2 per cent seen in Germany by end-2022, 36.4 per cent in India, and 47.7 per cent for the average of emerging economies, and China is now fast approaching the leverage ratio of 74.4 per cent in the United States and 68.2 per cent in Japan.
Excessive levels of indebtedness and slow income growth among Chinese residents are constraining consumption, but for now China’s Politburo is relying more on domestic demand to drive up the national growth, based on sentiment expressed at its quarterly conference last week.
The National Development and Reform Commission also rolled out 20 consumer-stimulus measures earlier this week, loosening purchasing restrictions on automobiles and property sales while vowing to improve the nation’s consumption environment.
Consumption contributed to 32.8 per cent of China’s GDP growth in 2022, down from 58.3 per cent in 2021, as market entities and households were heavily affected by zero-Covid controls.
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In the second quarter of this year, consumption drove 77.2 per cent of the growth amid the Covid reopening.
Although Chinese residents’ savings grew by 12 trillion yuan in the first half of this year – or 67 per cent of the full-year growth in 2022 – the NIFD report attributed this to a rise in private financing and the temporary suspension of financial deleveraging.
Given the debt stress, residents are more likely to use their savings to pay off debt to reduce asset risks than to consume and invest, due to their “more pessimistic expectations of future economic growth”, it said.
In a research note released on Tuesday, the Economist Intelligence Unit (EIU) warned that Beijing’s boost of property and big-budget consumption could have limited effectiveness because it lacks decisive action such as household-focused fiscal transfers.
Consumers in China remain cautious due to their widespread uncertainty over future wage and employment opportunities, which may further drag down the country’s economic momentum, it added.
As Chinese households are repairing their balance sheets – a result of the three-year pandemic – many have increased their savings and also focused on repaying existing mortgage loans with higher interest rates than newer loans.
Empirical evidence also indicates that the decline in housing purchases may induce a further drop in sales of other big-ticket products, including home appliances, decorating materials, and automobiles.
Despite property assets shrinking, the NIFD said China is currently not in a balance-sheet recession, which has haunted Japan.
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However, if Beijing allows the private sector to repair the debt on its own, residents may further cut back on consumption and investment to pay off the debt, further reducing corporate earnings, which in turn reduces employment opportunities and incomes for residents as well as government tax revenue.
The think tank suggested that Beijing should increase its debt issuance while cutting interest rates more sharply to reduce interest payments on its huge stock of debt.
China’s total real-economy debt was about 380 trillion yuan, or 283.9 per cent of the national GDP, by the end of June, up from 273.1 per cent since late 2022.
An interest-rate cut of just 1 percentage point would reduce interest payments by almost 4 trillion yuan, which would significantly lift China’s sagging economy, it said.
