The US$7 trillion debt pile looming large over Chinese households

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BEIJING (April 25): The next front in China’s crackdown on debt is the one closest to home.

On the back of a boom in property prices, household borrowing has been climbing for ten years straight, at a pace that rivals any such run-up in major economies. At US$6.7 trillion, and a record 50% of gross domestic product, China’s private debt is now approaching developed-world levels and crimping the power of the consumer to spend.

Take Huang Panpan, a 33-year-old public-relations executive from Beijing. Last year, he took the plunge on a 2.9-million-yuan (US$460,000) mortgage on a 385-square-foot home and now faces monthly loan payments of about half of his take-home salary.

Since then, he’s been in austerity mode: cutting travel, selling stocks, putting off a car purchase as well as a plan to start his own business. "I was someone who never paid much attention to the price tags when buying things or booking trips," Huang said. "I feel more pressured financially with all that debt."

Until now, the purge driven by President Xi Jinping that’s focused on excesses in the shadow-banking sector and the credit-fueled acquisitions of corporate giants has had minimal impact on China’s unerringly stable expansion. The challenge for officials now is to tame rapid domestic credit growth at a time when trade tensions are already causing worries for the economic outlook.

Much of households’ surging debt level is linked to China’s housing bubble, which has seen new home prices in Beijing and Shanghai jump more than 25% over the last two years. Mortgages stood at 22.9 trillion yuan at the end of 2017, making up more than half of all household loans held by lenders, according to data from the People’s Bank of China.

More Stretched

The second largest component of the debt pile is so-called operating loans, which accounted for 22% of the entire hoard and are used to finance small businesses and sole traders, according to a calculation based on official data by Fitch Ratings analysts Jack Yuan and Andrew Fennell. Consumption lending, such as credit card and auto loans, takes roughly 19% of the total household debt, they wrote in a note in March.

Growing mortgage repayments could therefore reduce households’ incentives to buy other goods, pressuring the nation’s consumption growth, according to George Wu, chief economist at Huarong Securities Co. That’s a headwind for an increasingly important part of China’s growth outlook.

"This could undermine the authorities’ efforts to re-balance the economy towards consumption," Yuan and Fennell at Fitch wrote. The nation’s household debt-to-disposable income ratio could near 100% by 2020, versus the current 82% and closing the gap with the US’s 105% and Japan’s 99%, they said. "China’s household balance sheets now appear more stretched than those of most emerging markets."

To be sure, the traditionally high average rate of household saving in China — which far outstrips most developed markets — ought to provide a buffer against debt distress. But habits change, and younger consumers may be more likely to use surplus income to service debt than put aside.

That’s especially risky in China, as the country’s social welfare and medical care aren’t as sound as those in developed nations, where residents may take on more debt more because their governments offer better social benefits, Jiang Chao, an analyst at Haitong Securities Co said earlier this year. The rise in the household leverage is "very irrational," he said.

"The policy makers can’t let household leverage rise this fast, as this doesn’t fit the goal of controlling overall debt growth and offsets the efforts of the deleveraging campaign," said Robin Xing, chief China economist at Morgan Stanley Asia Ltd in Hong Kong. "That’s why we think the central bank will boost broad interest rates — it needs to contain financial risks" that are being created by surging individual and corporate leverage.

China’s economy has proven unexpectedly resilient in face of Xi’s war against debt, with GDP expanding at 6.8% in the first quarter. That said, top government officials led by Xi himself sounded an unexpected warning note this week, signaling the difficulty of hitting growth targets if trade tensions escalate.

Attention Needed

For MK Tang, Hong Kong-based senior China economist at Goldman Sachs Group Inc, getting the balance right in approaching the issue will be tricky. The government neither wants the debt pile to destabilize the financial system, nor wants tighter rules to create too big a shock to the markets or hurt the economy, he said.

Also, at least up until now, the accumulation of household debt helped boost growth through its support of the housing market, according to Haitong’s Jiang. And some consumers may have increased purchases of consumer products thanks to their mortgage debt, as they don’t need to save all their income to buy a house with cash, Tang says. All these complicate the decision-making on the crackdown of the debt pile.

So far, the authorities have done little to directly address consumer indebtedness, aside from warnings from officials like former central bank governor Zhou Xiaochuan. In one of the few actions to directly address the issue, the banking regulator said late last year that it halted issuing licenses to micro-lenders that offer unsecured loans over the internet.

Slower Growth

The situation leaves borrowers exposed to the chances of a broader increase in interest rates if faster inflation materializes. That will only make Beijing resident Huang’s life harder.

"I need to reduce consumption more, if an interest-rate hike leads to a significant increase in the mortgage that I have to repay," said Huang. "Goodbye to membership cards at restaurants and my investments in small businesses. I won’t buy things that aren’t absolutely necessary."