China’s Household Borrowing Reaches Record 50% of GDP

China risks getting old before it gets rich. Like so many journalistic cliches, this misses the real story: how mainland households risk getting too indebted before getting rich or old.

At about $7 trillion, household debt is now a record 50% of gross domestic product. Not astounding compared with, say, France or Japan, both of which have ratios north of 55%. And most certainly not relative to the US and UK. According to detailed Bank for International Settlements data from 2016, Britain’s and America’s ratios were 87% and 79% respectively, Atimes reported.

Yet the trajectory of household debt is troubling on two fronts. One, China’s level of development. Beijing, remember, has yet to prove it will beat the middle-income trap that ensnares all too many developing nations around the $10,000 level. China is currently around $9,000 in nominal terms.

Another: The consumption growth that excites investors is increasingly debt-financed and, therefore, unsustainable. This matters because the rising wages China has enjoyed this past decade might stall to some extent. Without a surge in productivity, income gains are denting Chinese competitiveness. That’s why Indonesia, the Philippines, Thailand, Vietnam and others are angling for factories in China.

Much is made of how China must focus more on the quality of GDP than the quantity. Sadly, President Xi Jinping has only talked about this vital transition. It’s great, for example, that Xi recently tapped the reform-minded Liu He to oversee financial retooling. As vice-premier, Liu will work with The People’s Bank of China to take air out of debt, credit and property bubbles.

There’s just one problem, and it’s a big one: Xi’s 6.5% growth target. In both 2016 and 2017, the punditariat said that, surely, Xi was confident enough to scrap the GDP goal. Nope. Same thing in March, when the Communist Party made Xi leader for life. Nope, again. The party’s 6.5% aim throws cold water on hopes a newly supersized Xi will get a handle on China’s excesses to avoid a debt reckoning.

How much latitude will Liu have to shake things up? Only Xi knows. The bigger question is whether Xi’s long reign actually deadens the appetite for epochal reform.