Advertisement
Advertisement
China economy
Get more with myNEWS
A personalised news feed of stories that matter to you
Learn more
October retail sales in China rose 7.2 per cent year-on-year, a near 16-year low. Photo: AP

China’s rising household debt a ‘major concern’ as government tries to boost consumption amid trade war

  • Household debt in China hit 60.4 per cent of its gross domestic product at the end of 2018, according to the People’s Bank of China (PBOC)
  • The rapid growth of household debt has raised concerns among policymakers and analysts at the same time the government tries to boost consumption

A household debt crisis may be brewing in China as the government tries to boost sluggish consumption amid a domestic economic slowdown and trade war with the United States.

China’s household debt had ballooned to 60.4 per cent of its gross domestic product (GDP) at the end of 2018, the People’s Bank of China (PBOC) said in its annual financial stability report last week.

And for the first time, the household debt to income ratio hit 99.9 per cent, meaning that total debt is now roughly equal to total household income among the average Chinese household.

“[Household debt growth] is a major concern for the central bank,” said Xia Le, chief economist for Asia at Spanish banking group BBVA. “Looking at the rate of growth of household debt or leverage, in just over two or three years, it’s already grown to a level where you can’t say it’s particularly safe or low. It may be becoming a financial risk.”

Looking at the rate of growth of household debt or leverage, in just over two or three years, it’s already grown to a level where you can’t say it’s particularly safe or low. It may be becoming a financial risk
Xia Le

China’s central bank has warned against rapid growth of household debt, particularly in the form of mortgage and consumer loans. At the end of 2018, the housing loan to income ratio hit 47.7 per cent, up 3.7 per cent from 2017, according to the PBOC.

Besides housing loans, consumer lending has also skyrocketed. Fitch Ratings estimated that the outstanding balance of credit card receivables reached 7.23 trillion yuan (US$1 trillion) by the first half of this year, after a nearly 30 per cent compound annual growth rate over the past five years.

Signs that people are struggling to repay their credit card debt are also showing. Late payments on credit cards have been rising this year, while there was also an increase in the number of credit card loans that had soured at some banks during the first half of 2019, according to Fitch.

Disposable income, on the other hand, has not kept pace with the surging household debt. The inflation-adjusted year-on-year growth of per capita disposable income in rural regions was 6.4 per cent between January and September, compared with 5.4 per cent in urban areas, according to the National Bureau of Statistics.

China’s government has made stabilising consumption a priority this year and has implemented tax cuts worth close to 2 trillion yuan (US$284 billion). But analysts are sceptical they will spur spending among Chinese given the level of indebtedness and growth levels that have hit near 30-year lows in the world’s second largest economy.

Retail sales in October rose 7.2 per cent year-on-year, a near 16-year low. One of the biggest factors dragging retail sales was car sales, which fell 4 per cent in October, the 15th straight month of decline, against a backdrop of weak consumer confidence.

Last month, Singles’ Day shopping sales at Chinese e-commerce giant Alibaba Group Holding hit a record US$38.4 billion. However, overall sales growth for the annual shopping festival eased by 26 per cent, the weakest pace since the event started in 2009. Alibaba is the owner of the South China Morning Post.

“It is partially related to higher leverage and debt repayment,” Rory Green, China economist at TS Lombard, said of China’s poor retail sales. “Another key factor is consumer sentiment, which has remained subdued thanks to the domestic economic slowdown and the trade war.”

Yu Yongding, a senior Chinese government adviser, said slow growth had hurt investment and consumption.

With wage growth expected to moderate and trade-war fuelled uncertainty unlikely to go away soon, we also see household consumption growth softening in 2020.
Louis Kuijs

“The pessimistic expectations of continued decline in gross domestic production have made the trend of reduction in investment and consumption more apparent,” Yu, a fellow at the Chinese Academy of Social Sciences, wrote in an article for Caijing Magazine published on Sunday.

China’s economic growth slipped to 6 per cent in the third quarter and many economists believe it could decline further next year. 

Household consumption is likely to remain weak in 2020 as a result of slower wage growth, said Louis Kuijs, who leads Oxford Economics’s Asia research.

“We expect GDP growth to ease further in 2020, from 6.1 per cent to 5.7 per cent this year,” Kuijs said. “With wage growth expected to moderate and trade-war fuelled uncertainty unlikely to go away soon, we also see household consumption growth softening in 2020.

“But consumption remains the most stable part of the economy and we expect it to continue to hold up relatively well at 6.8 per cent, compared to an estimated 6.6 per cent this year.”

Post