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COMMENTARY: China's Sudden Rise in Household Debt Could Put Economy at Risk

Authorities want lots of consumer spending but are seeking to rein in peer-to-peer microlending, other forms of easy money that enable too much of it.

Mark Melnicoe
    Nov 03, 2018 4:30 AM  PT
COMMENTARY: China's Sudden Rise in Household Debt Could Put Economy at Risk

The Chinese people have long been known as prolific savers, a factor in the country's ability to withstand economic shocks without a crash. But that is suddenly changing.

China's expanding middle class, especially its young consumers, are starting to act more like those of us in the West. Instead of practicing frugality, they are amassing enough debt to warrant serious concerns about economic stability.

The relatively recent advent of credit cards and an online lending system make it incredibly easy for today's young generation to borrow, and they feel less reticent to spend only what they earn than their parents did. Now they also feel emboldened to spend much more than they earn by taking on debt.

Li Ming, 29, told the news portal Caixin that he has borrowed nearly 300,000 yuan ($43,295) through a combination of bank loans and microlending platforms during the past year. Li said he invested the money in cryptocurrencies such as Bitcoin, which have been highly volatile. He said he faces mounting repayment pressures.

"It was OK to repay 10,000 yuan every month, but it will soon rise to 50,000 yuan with principal payment, and it will be difficult to afford," Li told Caixin.

Soaring Debt

While young Chinese like to invest in the stock market, most don't borrow to do it. The rapidly increasing debt can be traced mainly to home prices, which have gone almost straight up over the past few years.

As a result, household debt is soaring in the Middle Kingdom. Last year, the ratio of consumer debt to GDP reached 49 percent, an increase of nearly 20 percentage points in five years. While that remains lower than developed economies like the U.S. and Japan, China is catching up fast. The increase has been particularly steep in the past two years.

"No other country saw its private debt burden rising so fast," said the German insurer Allianz.

In addition to homes, consumers in their 20s and 30s are borrowing to buy vehicles and family vacations as more and more Chinese travel abroad. Chinese authorities are trying to put the brakes on lending via measures to stem the housing price surge, with some success.

Minimum down payments have been raised, rules have been tightened on purchases of second homes, banks have been pushed to slow mortgage lending, and a crackdown is taking place against unlicensed real estate agents.

Still, young adults in China want to own their own home. While many cultural norms are on the way out, it remains difficult for a man to attract a bride if he does not own his own apartment. And there's a general feeling that prices will simply keep going up.

The Rise of P2P

Since the global financial crisis of 2008, China's debt has accumulated at an alarming rate. But until very recently it was driven by local governments and corporations, flush with government stimulus money to build infrastructure and increase factory capacity in the wake of the crisis.

But mortgage debt has increased steeply in the last two years amid a continuing climb in home prices. Borrowers are using new online peer-to-peer lending platforms that dole out cash without collateral, sometimes at the click of a button on a phone app. Many of these platforms, which get their funds from investors, are competing for market share, so loans are not hard to get.

These loans, in fact, are so accessible that when consumers encounter difficulty in repaying, they simply borrow from another platform - something resembling a pyramid scheme that could come crashing down. The lack of credit data on consumers makes default risks hard to monitor but no doubt increases their likelihood.

Regulators have targeted risky online lending, with some success. But standard loans from banks and via credit cards still show a rapid ascent. According to the People's Bank of China, credit-card debt has catapulted from 250 billion yuan ($36 billion) in 2009 to 6.25 trillion yuan at the end of June – an annual growth rate of more than 50 percent, Caixin reported.

All of this has helped spark the rise of China's consumer class, in line with government policy. For the past several years, the central authorities have been pushing to change China's economic model, moving to a more sustainable economy driven by domestic consumer spending and less reliant on investment and exports. Easy credit and an amazingly nimble e-commerce industry have facilitated the huge rise in consumption.

A Need for Balance

But the rapid household debt buildup is now sparking fears that it could go right over a cliff. Without as much family savings in bank accounts, financial institutions have less money to lend. And when people get into too much debt, there's an increased risk of default. Consumers might stop spending, risking the country's long-term consumption.

Now the authorities need to rein some of it in.

"If we don't deal with it carefully, household debt could become a serious risk," the English-language version of Global Times, a Communist Party newspaper, said in an editorial this week. "Deleveraging must cover more than just local governments and businesses – it must also cover households."

But China's economic architects face a balancing act. They must find a sweet spot that gets consumers to spend more responsibly but doesn't risk the four-decade economic miracle that has enabled hundreds of billions of people to rise out of poverty and make such purchases in the first place.