When it comes to China’s debt, the first thought is generally government and corporate debt, while personal debt has not received much social attention for a long time. But some experts recently pointed out that China has one of the fastest growing leverage ratios among its residents over the past five years, and that China’s bank card debt ratio has surpassed that of the United States. So how much debt are the Chinese carrying? And how risky is it?
When it comes to the debt burden of the Chinese, there are several different indicators in the industry, including the resident leverage ratio, which is the total amount of resident debt divided by gross domestic product (GDP). China’s central bank said last week that the country’s macro leverage ratio has seen a phase increase due to the new crown epidemic, with the resident leverage ratio reaching 72.5%, up 7.4% year-over-year.
The degree of indebtedness can also be measured by the household gearing ratio, which is the total liabilities of residents divided by total household assets. The Credit Suisse Global Wealth Report shows that in 2019, the household gearing ratio of Chinese residents is 7%. In addition, the household debt-to-income ratio can also measure the level of personal debt, which is the total amount of resident debt divided by disposable income. A previous report jointly released by Southwest University of Finance and Economics and Ant Group showed that China’s household debt-to-income ratio reached 121.6% in 2018.
Chinese finance scholar He Jiangbing said the indicator has not received much attention for a long time due to the lack of public availability of the resident leverage ratio, but the data reflect several major trends in the Chinese economy.
“First, China’s economy has declined in recent years and people’s incomes have decreased, so they borrow more; second, rising housing prices have led to higher debt levels for residents; and third, consumption of big-ticket items (which has also increased significantly), including the purchase of new cars, while other burdens (which have also only increased), such as pensions, education and health care.”
China’s resident leverage far exceeds that of other large economies
The Chinese are carrying a lot of debt. (Reuters)
Zhou Qiong, general manager of the strategic development department of China Postal Savings Bank, recently published an op-ed in Sina, using the leverage ratio of China’s residents as of the third quarter of last year, as calculated by the Bank for International Settlements (BIS), to make a parallel comparison with other countries. She noted that although China ranked only 22nd out of 43 major countries with a leverage ratio of 61.1%, China’s residential leverage ratio has increased by 22.2% over the past five years, the highest among these countries and far outpacing the increases in other major economies such as the United States (0.9%), Japan (7.2%) and Germany (4%).
Among the various reasons for the climb in China’s resident leverage ratio, it is clear that housing prices are only going up but not down. According to Zhou Qiong, the resident leverage ratio is positively correlated with the house price index. Typically, residential leverage peaks two to three years after home prices peak, but China has yet to experience a significant drop in home prices, which has largely contributed to the high residential leverage ratio. According to New York-based Searas Data Information Corporation (CEIC), China’s home prices have almost exclusively risen between 2015 and 2019, with an average monthly increase of more than 7.5%.
Will Chinese mortgages trigger a financial crisis?
Li Hengqing, director of the Institute for Information and Strategic Studies in Washington, said China’s property market has been expanding over the past few decades, which has long defied the laws of market development.
“After the government advocated the industrialization and marketization of real estate, the rigid demand in the past drove a big rise in housing prices, and the property market is continuously hot. Therefore, in the past three decades, investing in real estate has become a choice that only makes money and does not lose money.”
Statistics from China’s central bank show that by the end of last year, the balance of China’s personal housing loans stood at about 34.4 trillion yuan, accounting for 54.5 percent of personal loans, meaning that more than half of China’s personal debt is home loans.
Chinese banking practitioner Zhou Qiong also mentioned in the article that among the top six economies in the world since the 2008 global financial crisis, only China is clearly in a phase of residential leverage, while several other countries have largely seen a trend of deleveraging. There is no absolute threshold as to how high the leverage of residents will trigger a financial crisis. However, a rapid rise in leverage is often accompanied by a real estate bubble, as exemplified by Spain and Ireland, and most of such countries have gone through the deleveraging process.
In addition to mortgages, credit card overdrafts are also an important part of China’s personal debt. Central Bank data show that by the end of last year, the balance of credit payable on Chinese bank cards was 7.91 trillion yuan, almost 1.5 times the balance of credit card loans in the U.S., according to the Federal Reserve Bank of New York. 2019 Report on the Indebtedness of China’s Consumer Youth shows that the penetration of credit products is close to 90% among young people, nearly half of whom are materially indebted.
But financial scholar He Jiangbing believes that despite China’s already high macro leverage, a financial crisis is unlikely in the short term.
“The Chinese economy is still relatively resilient. In addition, the economic pillars are different in each region of the country. Unless there is a massive closure or out-migration of factories in China, it may not trigger (a financial crisis).”
The central bank recently released a report saying that China’s resident leverage ratio has continued to rise since 2011 and the room for continued expansion of resident debt has been very limited, but the debt risk is still within manageable limits.
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