China must bring household debt under control, banking regulator says

China’s banking watchdog has publicly acknowledged that household debt levels are becoming a cause for concern.

In an interview published in Monday’s People’s Daily, the official mouthpiece of the ruling Communist Party, Guo Shuqing, chairman of the China Banking Regulatory Commission, said it was necessary for China to “lower corporate debt ratio and to curb the leverage ratio of households”.

While tackling financial risk has been a hot topic for some time – and one of President Xi Jinping’s headline goals for his second term in office – Guo has never before raised the issue in public.

Efforts to rein in household borrowing would be part of a broader campaign to lower debt levels across the economy, he said.

“The financial system is still prone to risks … And any financial turmoil will greatly endanger the country’s economic and social development.”

China’s banking regulator steps up fight against financial risk amid threat of ‘chaos’ in sector

The tone of the message was in stark contrast to comments made three months ago by Zhou Xiaochuan, the long-time governor of China’s central bank.

He said in October that the country’s household leverage ratio was “not too high in a global perspective but has been growing very fast in recent years”.

The authorities should pay attention to the rapid growth of private sector debt, but that “doesn’t mean we have to cut leverage now”, he said.

Household debt in the world’s second-largest economy – mainly in the form of mortgage loans – has certainly been growing. At the end of June last year, its ratio to gross domestic product was 46.5 per cent, up from 37.3 per cent at the same point in 2015 and 18.6 per cent in 2008.

Guo’s comments are a clear signal that Beijing does not want it to rise any higher.

Financial risk the ‘critical battle’ for Xi Jinping in next three years

Raymond Yeung, chief Greater China economist at ANZ Bank, said that although there were no official figures available for household debt it was clearly becoming a cause for concern.

“Economic risks like debt will be a top priority for the authorities this year,” he said. “They are even more important than GDP, as the growth momentum is likely to continue.”

While Xi has made no bones about debt controls being a centrepiece of his supply-side structural reforms, until recently the emphasis has been on local government and corporate debt – which stood at 163.4 per cent of GDP at the end of June 2017 – rather than household borrowing.

As recently as two years ago, Zhou actually said that China had room to grow household debt and “the logic was right” for mortgage loans to increase.

Chinese leaders identify top three economic battles: risk, poverty and pollution

The value of medium- and long-term loans to households – a good indicator of mortgage borrowing – rose to 5.3 trillion yuan (US$823.27 billion) in 2017, accounting for 39 per cent of all new loans, according to figures from the central bank.

Meanwhile, the property sector, which is closely associated with household debt, is facing growing pressure for a correction in response to rocketing home prices in major cities.

The Central Economic Work Conference last month called for greater risk control, and financial regulators responded by tightening lending to the property sector. Those controls are only likely to become more stringent in the wake of Guo’s comments.