China Household Debt Cause for Serious Concern

While there is much concern among the public about China’s local government debt and corporate debt, which are considered key sources of risk, the rising household debt and the consequent liquidity constraint should not be underestimated. Based on our research, the household debt problem has already become a huge hidden danger to the economic health of China.

For a long time the importance of household debt has been ignored given the relatively small proportion of household debt to China’s total debt, Xinhua reported.

According to data from the National Bureau of Statistics, China’s medium- and long-term household loans, mostly mortgages, reached 21.8 trillion yuan ($3.2 trillion) by the end of April, accounting for nearly 20% of the total loans.

But if you look at the household debt-to-GDP ratio, things are different. As of the end of last year, the household debt-to-GDP ratio hit 44.4%, and the figure is expected to be around 60% if provident fund loan data is taken into account.

From the perspective of historical experience, such a leverage ratio is not very high, close to the Japanese level of 62.5% at the end of 2016, but still lags behind America’s 79.5% and the UK’s 87.6%.

However, the situation might look more serious if we apply two other indicators. The ratio of newly added mortgages to households’ disposable income in China was 16.9% in 2016, far exceeding the pre-crisis peak in the US, which hit 11.2% in 2005. Moreover, the figure was only 6% or so in China in 2014, meaning that it surged significantly over just two years thanks in large part to the soaring property market.

Meanwhile, the ratio of mortgage balance—including provident fund loans—to households’ disposable income was 68.3% at the end of 2016. Even if the provident fund loans were deducted, the ratio still hit 56.4%. If household debt continues to accumulate at the current speed in the future, it is estimated that the mortgage balance-to-disposable income ratio in China might reach the American pre-crisis peak as early as 2020.

The above data analysis indicates that China’s household debt is a serious risk to financial security. As a result of the decline in income growth as well as mortgages, Chinese households have generally been short on liquidity. In other words, the soaring mortgages have inhibited China’s economic growth to a certain extent.