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3.04  China’s Household Debts

16 September 2018

The Growing China Household Debts and its Alarming Rate of Increase


In the report of China’s growing debt crisis, most coverage has focused mainly on the debts SOEs and the local governments owe to the big four state-owned banks. These liabilities constitute the bulk (82%) of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.

The picture, however, is changing rapidly as Chinese household debts are quickly catching up. Over the past few years, while financial regulators focused their attention on curbing risks from a corporate debt build-up and off-balance sheet activities, household loans have quietly surged. Constituting only about 18% of China’s total debt as of mid-2017,[1] it is easy to see why the households’ borrowing binge had managed to take place pretty much under the radar.  

3.04A Household Debt to GDP.png

According to Asia Times, China household debt has surged to about $7 trillion which amounts to a record 49% of GDP.[2] At this level of debt, China’s household finances look more stretched than those in most emerging markets but less than that in most developed economies, according to Fitch Ratings.[3] France and Japan have household debt-to-GDP ratio of more than 55% while Britain and the US ratios were 87% and 79% respectively, according to 2016 data from the Bank for International Settlements.[4] However, if the comparison is how fast household debt-to-GDP ratio has increased, then the picture points to a worrying trajectory. Chinese household debt-to-GDP ratio used to be 17.9% at the end of 2008. It has gone up about 3.5% annually since then to hit 49% by end of 2017. So in the period from 1993, when the data became available, to 2008, the ratio went from 8.3% to 17.9%, with an annual rise of 0.65 percentage points. But in 2016 and 2017, that annual increase accelerated to about 4.9 percentage points.[5] It took 40 years for the household debt-to-GDP ratio in the US to rise from a level of 20% to about 50%, but it took only less than 10 years in China. [6] And if  special housing funds, peer-to-peer lending programmes and private micro loans were factored in, that real household debt could be “8 percentage points” higher.

The picture is equally worrying if the comparison is made using household debt-to-disposable income ratios. Since 2015, China’s household debt-to-disposable income ratio has jumped 9 percentage points every year.[7] As of mid-2017, Chinese households had debts worth about 106% of their disposable incomes (see graph below) compared to the Americans’ 105%.[8] The difference is that, while the US is already an affluent developed country with a nominal per capita income of more than $57,000, China has yet to beat the middle-income trap with only about $9,000. In other words, Chinese households have become heavily in debt before they become rich.

3.04B Household Debt to Disposable Incom

Source: [9]


It is not that income has stagnated. In fact, Chinese households have been experiencing rapid income growth by rich-country standards for a long time. The problem is that their debts have grown even faster. Since the start of 2007, Chinese disposable household income has grown about 12% each year on average, but Chinese household debt has grown by about 23% each year. The cumulative effect is that while nominal income has slightly more than tripled, household debts have grown by nearly a factor of nine.[10]


Given its alarming rate of increasing, the household debt, though still relatively small, is beginning to affect the aggregate debt numbers. Today, household borrowers are responsible for about one third of the growth in total non-financial debt in China.[11] In 2017, household debt became the single biggest component of new credit in China’s banking system for the first time.[12] The rapid accumulation of house hold debt was the biggest factor behind the rise in China’s overall leverage last year, as the corporate sector’s debt ratio fell and local government borrowing was reined in as a result of strong government deleveraging efforts.[13]

Property Speculation, Financial Deregulation, and Changing Attitudes


The rapid increase of household debts can be attributed first and foremost to the surge in the hugely speculative housing market which caused mortgage and other property-related loans to also spike. The chief culprit for the housing market speculation is China’s excessive money printing in the last decade which benefited those who maximised their leverage to buy real estate as property prices skyrocketed.


According to official figures, the value of mortgage loans rose 22% in 2017, much faster than the 12.7% rise in total new credit.[14] By the end of last year, total outstanding individual mortgage loans and borrowing from the public housing fund rose to 26.4 trillion yuan. Altogether, housing-related loans made up 57% of overall household debt.[15]


Next, household debts also surged because of the deregulation of China’s consumer finance market in 2014. Before that, only banks were allowed to lend. The deregulation attracted many new lenders, including online peer-to-peer lenders. A whole new industry, including companies that provide digit credit scores of borrowers, has emerged. Today, thousands of P2P platforms, along with many finance companies, are offering consumer loans both online and offline.


To compete for a footing in an increasingly competitive market, lenders deploy hundreds of thousands of salespeople across China to hand out on-the-spot loans for phones, electronic gadgets and cars. In some locations, salespeople from as many as five different finance groups stationed themselves at the point-of-sales competing to give unsecured zero-interest loans to customers to help them make a purchase often with just a 20% down payment. After the initial loan, lenders routinely follow up with more loans to their new borrowers for other purchases but with interest ranging from 5% to 35%.


With the government encouraging domestic consumption to help wean the Chinese economy off debt-fuelled investment-driven export-led growth, the potential demand for consumer credit is huge. The burgeoning market is expected to be worth 3.4 trillion ($500 billion) by 2019. One finance group, the Beijing-based MeiLi Finance Group, reported that in June 2017 alone, its monthly lending reached $2bn. The return for the lenders is also high. Home Credit, currently the largest consumer finance company with 80,000 salespeople, enjoys an average return on equity of 16.2% in 2016.[16]


Finally, the surge in household debts can be attributed to dramatic shift in attitude on saving versus borrowing, especially among the millennials. Traditionally, Chinese avoid borrowing as personal debt was regarded as undesirable. During the time of centrally-planned command economy, there was also no need for mortgage loans as housing used to be allocated by their work units. Hence, most Chinese had never borrowed money and banks had no business in consumer finance. Fast forward a few decades and the situation today is changing with the rise of consumerism and the ease of getting loans as a result of the deregulation and the flush of liquidity brought about by the monetary easing. Banks which faced clamp down in lending to the state sector and local governments are more than happy to divert their lending to the increasing affluent household sector. Many younger Chinese, unlike their parents, are shedding the aversion to debt and are borrowing in order to enjoy right now.


That change in attitude is aptly depicted in a popular saying widely circulated on Chinese social media in recent years: “A man with a 50,000 yuan debt is responsible; 200,000 yuan of debt is financially savvy; 1 million yuan of debt is a homeowner; 10 million yuan of debt is classy; and a 1 billion yuan debt is chairman of a listed company ... if you don’t have any debt, you must be a total loser.” [17]


Implications of Rising Household Debts on the Chinese Economy


The increasing household debt has serious implications for the fragile economy still undergoing transformation.


For several decades, China has depended on household savings held in bank accounts to fund fixed asset investments that fuel the rapid growth of the economy. With many households now not only using their savings but also incurring debts to purchase properties, that situation is no longer true. Even though Chinese household savings remain high relative to that of other nations, the money is trapped in overvalued properties. [18]


However, not all are worried about the rising household indebtedness. According to the National Institute for Finance (NIF) and Development, a think tank affiliated with the Chinese Academy of Social Sciences, the mounting household debt is not a concern and the risks stemming from the high household debts should not be exaggerated. This is because, even though Chinese households have been borrowing more in recent years, the sector as a whole is still sitting on 70 trillion yuan ($11.13 trillion) worth of bank deposits and cash overall, far more than enough to offset the 40 trillion yuan in outstanding bank debt.[19] Hence, individual over-leveraged households may have assumed excessive credit risks but the overall sector faces little systemic risk. Moreover, the average disposable income is still enough for households to cover standard loan interest and mortgage repayments.


Detractors, however, have been quick to point out that the consumer debt is rising at a time when income growth has become sluggish amid a worsening economic outlook. In the first half of 2018, the rise in Chinese incomes slowed to 6.6% adjusted for inflation, a growth rate slower than that of GDP, according to the National Bureau of Statistics. That compares with 8.3% in the first half of 2014. Furthermore, rising wages in China over the past decade has already dented its economic competitiveness. Regional economies like Philippines, Thailand, and Vietnam all have considerably lower costs. Thus, without a surge in productivity, there is limited room for further income gains for Chinese households.[20]  


Moreover, China’s national income is mostly captured by government-controlled enterprises and their elite managers. So even though Chinese household debt-to-disposable income of 106%, as of mid-2017, was comparable to the Americans’ 105%, the share of national income (i.e. GDP) going to Chinese households, which range from 42% to 46% of GDP since 2007, is significantly lower than the more than 70% of GDP going to American households over the past few decades.[21] In just 2017 alone, the Chinese household’s share of income has dropped by about 1 percentage point. In short, Chinese households face increasing strains in servicing their debts if the patterns of borrowing to consume persist.


Looking ahead, the sluggish income growth, the relatively low share of national income, the mounting debts, the depreciating yuan, the weak performance in the country’s stock market and the rising uncertainty associated with the trade war, will all come together to weigh down on domestic demand. Recent figures already indicate that retail sales will likely remain weak even as the economy gravitates towards a per capita GDP of US$10,000. [22] Urban consumer spending growth in the second quarter of 2018 year-on-year, for example, was 4.7%, significantly lower than the 7.3% registered in the first quarter of 2014. [23] This means that Beijing’s hope that consumer spending will offset trade war-related export losses and help maintain steady economic growth may not materialize. Chinese consumers have become too heavily indebted at too early a stage of economic development. The debt-financed consumption growth that China has seen over the last few years is simply unsustainable without resulting in more leveraging of the household sector.


More pertinently, the lower spending caused by the excessive household debt may add more inertia to the already slowing Chinese economy. A study by Princeton University using international evidence based on data from the 1980s and 2000s found that there is a link between credit expansion and business cycles and that expansion in household credits inadvertently results in macroeconomic slowdown and rising unemployment.[24] It will mean that the Chinese government will have no choice but to continue with its “proven” strategy of using fixed asset investments through the local governments and the SOEs to maintain economic growth within the predefined range.


Mixed Success of Government Efforts to Control Mortgage Loans


Meanwhile, policymakers are closely monitoring the risks associated with mortgage loans which constitute 57% of all household debts. Highly-leveraged households are vulnerable to a potential shock from a deflating property market bubble when they face not only a significant reduction of wealth from the declining home prices but also difficulty in selling their homes to pay off their loans. To make things worse, banks may be calling in loans in a moment of panic. The dangers brought about by the presence of a potential real estate bubble are therefore real. [25]


Moreover, the risk is exacerbated by the widespread bad practices that have arisen because of the proliferation of non-bank lenders competing in a highly lucrative market. Many of these new lenders do not have risk-management skills at this point when offering loans. As a result, borrowers in need of quick cash have been able to borrow large amounts of money from several different lenders at the same time. So even though the loan size is small, one borrower could obtain loans from hundreds of different platforms. If such behaviour persisted on a wide scale, it could present systemic risk.[26]


To control the risks, the banking regulator, which has recently been merged with the insurance regulator, has begun to clamp down on consumer loans and credit cards, which are often used by property investors to get around restrictions on mortgages. [27] So far, restrictions on mortgage lending have been met with mixed success because borrowers simply bypass those restrictions by illicitly obtaining financing, in the forms of microloans and unsecured short-term loans, from the shadow banking sector.[28]


It will not be an overstatement to say that the mortgage-related household debt is a time tomb. Observers believe that Beijing cannot afford a drastic drop in housing prices. Today, the Communist Party relies more on the urban middle class than its historical support base of farmers and laborers. A collapse of the housing market would disproportionately hurt homeowners in big cities and spark a rebellion by the middle and upper classes. Beijing is likely to do whatever it takes to curb big changes in housing prices, even if it means adding a new distortion to the market.[29]


Still, given the disproportionate weightage of mortgage loans in the overall household debts, even a small home price decline will have a significant negative wealth impact which when happened will present a major challenge to not just the financial but also the socio-political stability in China. [30]

NIF may be right that the household sector as a whole still has more bank deposits and cash (70 trillion yuan) than total outstanding debt (40 trillion yuan). Still, so many Chinese households are parking their savings in property investment that in the event of an asset deflation, the number who see their value of their assets dissipated will be enough to cause socio-political upheaval across whole China. Hence, even though the household sector's total debt accumulation is relatively smaller than the corporate and local government sectors, it is an even bigger socio-political time bomb than the other two sectors. In short, the household sector has become too big to fail.

PREVIOUS: 3.03  China's Local Government Debts

NEXT: 3.05  Escaping the Debt Trap & Implementing Fundamental Reforms



[1] See Orange Wang. (2018). “Why China cannot rely on consumers to spend their way out of the trade war.” SCMP. 13 August, 2018.

[2] See William Pesek. (2018). “China’s latest bubble: household debt.” Asia Times. 28 April, 2018.

[3] See Reuters. (2018). “China's household finances look stretched versus most emerging markets – Fitch.” 27 March, 2018.

[4] See William Pesek. (2018). 

[5] See Frank Tang & Zhou Xin. (2018). “Famous for hoarding cash, Chinese families are now racking up debt on an unprecedented scale.” SCMP. 30 March, 2018.

[6] Ibid

[7] See Reuters. (2018). 

[8] See Matthew C Klein. (2018). “China’s household debt problem.” FT. 7 March , 2018.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] See Reuters. (2018). 

[13] See Frank Tang & Zhou Xin. (2018).

[14] See Maggie Zhang. (2018). “China’s banking watchdogs set sights on rising household debt problem.” SCMP. 10 March, 2018.

[15] See Orange Wang. (2018). 

[16] See Don Winland & Wang Xueqiao. (2017). “Deregulation creates China consumer loans boom.” FT. 23 July, 2017.

[17] See Frank Tang & Zhou Xin. (2018). 

[18] See Sara Hsu. (2018). “China's Household Debt A Growing Concern Amid Rising Home Prices.” Forbes. 26 February, 2018.

[19] See Frank Tang & Zhou Xin. (2018). 

[20] See Orange Wang. (2018). 

[21] See Matthew C Klein. (2018). 

[22] See Orange Wang. (2018). 

[23] Ibid.

[24] See Atif Mian. (2018). “The Credit-Driven Household Demand Channel.” 26 May, 2018.

[25] See Sara Hsu. (2018). 

[26] See Don Winland & Wang Xueqiao. (2017). 

[27] See Frank Tang & Zhou Xin. (2018). 

[28] See Sara Hsu. (2018). 

[29] See Hiroshi Murayama. (2018). “China's soaring household debt backs Beijing into a corner.” Nikkei Asian Review. 2 August, 2018.

[30] See Sara Hsu. (2018). 

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