Opinion | How property-hungry Chinese millennials and shadow banking could fuel a financial crisis

Name: China GDP: economy grew by 4.9 per cent in third quarter of 2020
Uploaded: 2020-11-30T20:15:05.000Z
Duration: 1 min 47 s
Description: China GDP: economy grew by 4.9 per cent in third quarter of 2020

Millennials are borrowing heavily to invest in property, counting on the government to keep property prices buoyant. However, the rise of shadow banking means the government lacks the levers it has historically pulled to prevent a debt crisis

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Andy Xie

Published: 4:15am, 1 Dec 2020Updated: 10:59am, 1 Dec 2020

China’s household debt has surged again after the Covid-19 pandemic was brought under control in May, driven by bets on property prices rising. By the end of 2020, household debt could reach 150 per cent of disposable income. Moreover, the debt seems to be concentrated among millennials. This generation may be collectively betting on the government keeping property prices rising for many years to come. If the government cannot keep this assumed promise, a financial crisis is likely.

China’s household debt has roughly quadrupled in the past five years to 62 trillion yuan (US$9.4 trillion). While detailed statistics are sketchy, data from some banks suggest that millennials are the main driver and betting on property appreciation the main motivation. The generational concentration makes it a higher risk to financial stability.

China’s financial system has been extraordinarily stable. Even when non-performing loans hit 40 per cent in 1998, the banking system kept going with minor tinkering. The bad banks that held non-performing loans recovered due to subsequent asset inflation, not serious structural reforms.

After China grew out of this banking crisis, the government’s financial strategy appears to have remained the same. When there is a financial problem, let time take care of it.

It worked because China had high growth potential and low leverage. China’s growth model has focused on investment and exports, backed by an undervalued exchange rate. Because of its size, China has been able to delay the inflationary pressure of monetary expansion by channelling excess liquidity into asset markets. Asset inflation has been the financial system’s main source of capital.

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China GDP: economy grew by 4.9 per cent in third quarter of 2020

The above model has been running into difficulties in the past five years, mainly because of declining growth potential. The productivity gain from investment has shrunk due to its repetitive nature. China’s labour force has been declining. When growth is low, rapid monetary expansion to prop up asset markets leads to rising debt, which makes the financial system increasingly fragile.

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