China's Household Debt Hits Record High — and It's Still Rising

China's Household Debt Hits Record High — and It's Still Rising

Why you should care

Because no other country’s debt burden is soaring so quickly. 

China’s household debt reached a record high last year, adding to worries that the burden of debt services could weigh on long-term consumer spending and drag on growth in the world’s second-largest economy. According to German insurer Allianz’s latest global wealth report:

The country’s ratio of household debt to gross domestic product hit an all-time high of 49.1 percent in 2017, marking an increase of nearly 20 percentage points over the past five years.

“This amounts to an increase of 30 percentage points in just 10 years — no other country saw its private debt burden rising so fast,” Allianz said, with the caveat that “China needed to catch up to some extent, as Chinese private households only obtained access to bank loans in 2003.”

The report comes amid concern over the extraordinary increase in Chinese debt since the 2008 global financial crisis.

In China, corporations and local governments were the main drivers of the country’s debt accumulation through to 2016, thanks to stimulus policies that promoted investment in factory capacity and public infrastructure.

But steep increases in house prices have led to an increase in mortgage debt, while the rapid rise of online consumer lending — which barely existed four years ago — have combined to cause a sharp rise in household debt in the past two years. Regulators have recently cracked down on risky online lending, causing the flow of loans to slow.

Chinese household consumption as a share of GDP remains low by international standards at 39.1 percent. In the U.S. and EU, the same ratio is 68.4 percent and 55.6 percent, respectively. But consumption has been the biggest driver of China’s GDP growth for four straight years.

Rising debt and slower growth of household income are sparking concern about the impact on consumption and growth.

“Consumption decline is the main risk to the economy this year,” Jianguang Shen, China economist at consumer finance group JD Finance, wrote in a report.

Shen added that, due to rising wealth inequality, the consumption patterns of different groups have diverged.

“Rising housing prices have a positive influence on those who already have their own houses. It shows that they have been spending more on luxury goods, advanced education, advanced medical care and services, and overseas tourism,” wrote Shen.

“[But] for tenants and those planning to buy a house, rising housing prices will reduce residents’ disposable income,” Shen concluded. “They will downgrade their consumption in the short run and pay more attention to cost.”

+
By Gabriel Wildau and Edward White

OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2018.

OZYAcumen

Numbers and factoids — fodder for your next cocktail party.