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Chinese consumers may need to learn to save again, say economists

After decades of thrift, they're taking on too much personal debt

Andrew Polk | Bloomberg 

Chinese consumers may need to learn to save again, say economists

For years, economists and policymakers have hailed the propensity of Chinese to save. Among other things, they’ve pointed to low household debt as reason not to fear a financial crash in the world's second-biggest economy. Now, though, one of China's greatest economic strengths is becoming a crucial weakness.

Over the past two weeks, as they've held their annual work meetings, China's various financial regulatory bodies have raised fears that Chinese households may be overleveraged. Banking regulators sound especially concerned, and understandably so: Data released Monday showed that Chinese households borrowed 910 billion renminbi ($143 billion) in January — nearly a third of all RMB-denominated bank loans extended that month.

While too much can be made of the headline number -- lending is always disproportionately large in January, and bank loans are rising as regulators crack down on more shadowy forms of financing — the pace of growth for household debt is worrying. Between January and October last year, according to recent data from of Finance and Economics, Chinese household leverage rose more than eight percentage points, from 44.8 percent to 53.2 percent of GDP — a record increase.

By contrast, between 2009 and 2015, households had added an average of just three percentage points to their debt-to-GDP ratio each year, and that includes a large jump of 5.5 percentage points in 2009 as banks ramped up lending in response to the global financial crisis. Before 2009, household debt levels had hovered around 18 percent of GDP for five years. In other words, the debt burden for has nearly tripled in the past decade.

Part of that rapid debt expansion has been deliberate. China’s government has encouraged increased borrowing and spending on items like cars and houses, to boost both consumption and investment. At the G-20 summit in February 2016, China's chief remarked that rising household leverage had “a certain logic to it.”

At the same time, a generational shift is unfolding. Younger, urban Chinese are proving more willing to bring their consumption forward to today rather than pushing it off to the future as their parents did.

Most worryingly, though, skyrocketing home prices seem to be driving much of the increase in household debt. Higher mortgage rates — and, especially, government policy — have compounded the problem. In order to slow rising prices, officials have raised down-payment requirements, pushed banks to slow mortgage lending and placed administrative restraints on purchases. That's led buyers to borrow from different, often more expensive, channels. Online peer-to-peer lenders, for instance, who charge much higher rates than banks, have become popular sources for borrowing cash for down payments.

Throughout 2017, borrowers also began classifying their loans as more bread-and-butter consumer loans, as opposed to mortgages. That's undercut banks’ attempts to reduce lending to the property sector. Over RMB 1 trillion worth of short-term consumer loans were created in just the first seven months of 2017 — nearly triple the same period in 2016.

Regulators have started getting wise. In September, banking regulators in Beijing, and the province of all began requiring greater documentation and disclosure for obtaining consumer loans, to prevent the money from illegally finding its way into the housing market. even began requiring borrowers to produce invoices after the fact, showing exactly what was purchased with the loan. Other cities sought to close glaring loopholes, such as the fact that some “personal consumption" loans carried maturities of 30 years. Shenzhen, one of 2017’s hottest property markets, lowered the maximum to five years.

Despite these efforts, households are still in the mood to borrow, as the lending data from January show. That's the first and most vexing consequence of the government's well-meaning efforts to boost consumption: Once the debt genie is out of the bottle, it's very difficult to squeeze back in. If China's households continue borrowing at their current pace, it would take only four or five years before their debt-to-GDP ratio reaches the same level as in the U.S. just before the 2008 crash.

© 2018 Bloomberg


First Published: Thu, February 15 2018. 21:14 IST
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