Most household debt is linked to the housing bubble but operating loans and consumption lending are also an issue
The $7 trillion debt pile looming over Chinese households
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 10 years straight, at a pace that rivals any such run-up in major economies. At $6.7 trillion, and a record 50 per cent of gross domestic product, private debt is now approaching developed-world levels and crimping consumer spending power.
Take Huang Panpan, a 33-year-old public-relations executive from Beijing. Last year, he took the plunge on a 2.9-million-yuan ($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," Mr 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-fuelled acquisitions of corporate giants has had minimal impact on unerringly stable economic 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 the housing bubble, which has seen new home prices in Beijing and Shanghai jump more than 25 per cent 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, People’s Bank of China data show.
The second-largest component of the debt pile is so-called operating loans, which accounted for 22 per cent 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 per cent of the total household debt, they wrote in a note in March. Other forms of household credit provided outside the banking system include margin lending, peer-to-peer loans and micro-lending, which have also been rising rapidly, they said.
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. That’s a headwind for an increasingly important part of the growth outlook.
"This could undermine the authorities’ efforts to re-balance the economy towards consumption," Mr Yuan and Mr Fennell wrote. The nation’s household debt-to-disposable income ratio could near 100 per cent by 2020, versus the current 82 per cent and closing the gap with the US’s 105 per cent and Japan’s 99 per cent, they said. "Household balance sheets now appear more stretched than those of most emerging markets."
To be sure, the traditionally high average rate of household saving - 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 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 said earlier this year. The rise in the household leverage is "very irrational," he said.
"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 in Hong Kong. "That’s why we think the central bank will boost broad interest rates - it needs to contain financial risks" being created by surging individual and corporate leverage.
The economy has proven unexpectedly resilient in face of Xi’s war against debt, with GDP expanding 6.8 per cent 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.
For MK Tang, Hong Kong-based senior China economist at Goldman Sachs Group, getting the balance right in approaching the issue will be tricky. The government neither wants the debt pile to destabilise 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 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, Mr Tang says. All these complicate decision-making on the debt crackdown.
So far, 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.
The situation leaves borrowers exposed to a broader increase in interest rates if faster inflation materializes. That will only make Beijing resident Mr 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 Mr Huang. "Goodbye to membership cards at restaurants and my investments in small businesses. I won’t buy things that aren’t absolutely necessary."