The Chinese economy is currently facing a dilemma. High levels of indebtedness combined with slow income growth among the residents are weighing down consumption. However, China’s Politburo is still banking on domestic demand to fuel economic growth. Given the current debt scenario, it appears more plausible that residents would prioritize settling loans and diminishing asset risks over consumption and investment.
Chinese households have reported an upswing in indebtedness while grappling with uncertainties in employment and income. These factors are adding pressure to the nation’s economic slowdown, prompting concerns about whether Beijing’s recent push for consumption can effectively stimulate spending. Industry analysts have raised doubts about the real spending ability of consumers, as income growth has failed to keep pace with economic expansion. Consequently, individuals are more inclined to save for mortgage payments, utilities, child-rearing, and to cushion against future uncertainties.
Data provided by the National Institution for Finance and Development (NIFD) reveals that China’s household debt rose to 63.5% of the national GDP in the second quarter, up from 61.9% at the end of the previous year. This figure is inching closer to the 65% red line that the International Monetary Fund has traditionally used as an indicator of impending financial risks.
China’s household debt primarily comprises mortgage loans, which totaled 38.6 trillion yuan (US$5.38 trillion) by the end of June. Consumer goods loans, credit card debt, private borrowings, and loans used to fund business operations also contribute to the overall household debt.
Researchers Zhang Xiaojing and Liu Lei from a Beijing-based think tank note that there was a fall in the effective demand for both household consumption and investment. They attributed weak household spending to slow income growth and, in turn, the broader economic slowdown. The increase in China’s household leverage ratio has been sharp since 2008 when Beijing’s policymakers initiated a 4-trillion-yuan stimulus package and eased monetary policy to combat the financial crisis.
The Covid-19 pandemic reopening saw consumption drive 77.2% of growth in this year’s second quarter. Despite savings of Chinese residents growing by 12 trillion yuan in the first half of this year, the NIFD report suggests that this is more likely due to a rise in private financing and a temporary halt of financial deleveraging. With looming debt stress, residents are more likely to utilize their savings to offset debt and reduce asset risks rather than consume and invest. This inclination is largely due to their “more pessimistic expectations of future economic growth.”
The Economist Intelligence Unit (EIU) issued a research note warning that Beijing’s measures to stimulate property and big-budget consumption might have limited effectiveness. This is due to the lack of decisive actions such as household-focused fiscal transfers. Chinese consumers are cautious about future prospects for wages and employment, contributing to a drag on the country’s economic momentum.
Post-pandemic, Chinese households are repairing their balance sheets, which involves increasing savings and focusing on repaying existing mortgage loans with higher interest rates than new ones. Government data shows a decrease of 0.8% in China’s outstanding mortgage loans in the second quarter compared to the same period a year earlier, marking the first decline in over a decade. Empirical evidence suggests that the decrease in housing purchases could also lead to a drop in the sales of other high-ticket items such as home appliances, decorating materials, and automobiles.
Despite shrinking property assets, the NIFD does not believe that China is currently experiencing a balance-sheet recession, a problem that has plagued Japan in the past.
Chinese households continue to grapple with increased indebtedness while they also have to contend with uncertainties in jobs and incomes. These factors have been contributing to the country’s economic slowdown and have raised questions about the effectiveness of Beijing’s new consumption drive.
Analysts have been expressing concerns over the real spending power of Chinese consumers as their income growth has failed to keep pace with economic expansion. This has led them to become more inclined to save for mortgage payments, utilities, child-rearing, and to safeguard against future uncertainties.
China’s household debt rose to 63.5% of the national GDP in the second quarter, an increase from 61.9% at the end of last year, according to a report by the NIFD. This is perilously close to the 65% red line that the IMF previously used as a warning point for financial risks.
The debt of Chinese households consists mainly of mortgage loans, which amounted to 38.6 trillion yuan (US$5.38 trillion) by the end of June. Other forms of debt include consumer goods loans, credit card debt, private borrowings, and business operation loans.
Zhang Xiaojing and Liu Lei, researchers from a Beijing-based think tank, observed that the effective demand for both household consumption and investment had fallen. They attributed this decrease to the slow growth of income and, ultimately, the slow economic growth. China has seen a rapid increase in its household leverage ratio since 2008 when Beijing’s policymakers rolled out a 4-trillion-yuan stimulus package and eased monetary policy to counter the financial crisis.
Despite residents’ savings growing by 12 trillion yuan in the first half of this year, the NIFD report suggests that this increase was due to a rise in private financing and the temporary suspension of financial deleveraging. Given the debt stress, residents appear more likely to use their savings to pay off debt to reduce asset risks than to consume and invest. This tendency arises from their “more pessimistic expectations of future economic growth.”
The EIU warned that Beijing’s efforts to boost property and big-budget consumption might have limited effectiveness due to the lack of decisive actions such as household-focused fiscal transfers. Chinese consumers are remaining cautious due to widespread uncertainty over future wage and employment opportunities, which might further hamper the country’s economic momentum.
As Chinese households work on restoring their balance sheets in the aftermath of the three-year-long pandemic, many have increased their savings and have focused on repaying existing mortgage loans with higher interest rates than newer loans. Government data indicates that China’s outstanding mortgage loans dropped 0.8% in the second quarter from a year earlier, the first decline in more than a decade.
The declining trend in housing purchases may lead to a further drop in sales of other big-ticket products, including home appliances, decorating materials, and automobiles. Despite the decrease in property assets, the NIFD stated that China is currently not in a balance-sheet recession.
In an attempt to boost the economy, China’s Politburo is relying more on domestic demand. During its quarterly conference last week, it expressed its expectation of a boost in national growth through increased domestic consumption. The National Development and Reform Commission also rolled out 20 consumer-stimulus measures earlier this week. These include loosening restrictions on car and property sales and promising to enhance the nation’s consumption environment.
However, if Beijing allows the private sector to manage its debt, residents may further cut back on consumption and investment to pay off the debt. This could further reduce corporate earnings, which in turn, could lead to fewer employment opportunities and lower income for residents, as well as decreased government tax revenue.
The Beijing-based think tank suggests that Beijing should increase its debt issuance while more drastically cutting interest rates to reduce interest payments on its enormous stock of debt.
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