China’s recovery from the pandemic will make it one of the few economies to grow in 2020, according to the International Monetary Fund. That’s down in no small part to the still-burgeoning debt of Chinese households.
This year, Chinese consumption has been far weaker than other varieties of economic activity, with year-over-year retail sales of consumer goods still negative. But that doesn’t mean Chinese families are sitting on the sidelines: the scale of household borrowing marks a major difference between China and the West this year.
In fact, still-rising household debt may continue to drag on consumer spending in the medium to long term, with a greater portion of incomes redirected to interest.
The IMF’s global financial stability report illustrates that while corporate debt growth has surged in advanced economies this year, in China and other emerging markets household debt growth has risen at a faster clip.
Among the largest 10 economies in the world, China’s household debt to GDP ratio has risen by far the most rapidly in recent years: it is 31.6 percentage points higher than it was 10 years ago, far above Canada’s second-place 10.1 percentage point increase. U.S. household debt to GDP is down by nearly 20 percentage points, declining from high levels reached shortly after the global financial crisis.
What’s more, unlike in many countries where overall household debt is rising but servicing costs are falling, China’s central bankers have been resistant to the idea of broad interest rate cuts this year.
In 2019, the IMF altered its forecasts for Chinese household debt to reflect the likely continuation of this rapid rise, after years of projecting that borrowing would soon come under control. It projected a household debt-to-GDP ratio of about 68% by the end of 2024, up from 54% at the end of 2018. But the pandemic means that is likely now far too conservative.
Most of that debt, and likely most from this year too, goes toward property purchases, which explains why real-estate investment is now effectively back to normal, growing at a double-digit rate year-over-year.
The other point of interest illuminated by the IMF is how relatively modest China’s response to the pandemic has been. It is one of the few countries in the world where both household and corporate lending growth in the first six months of the year was actually slower than the general pace over the previous five years. These modest flows of new lending do, however, probably conceal a big jump in the stock of credit—massive loan forbearance by state owned banks, heavily leaned on by Beijing, has been a key plank in China’s strategy to make it through the coronavirus pinch.
The nexus between banks, home buyers and real-estate developers has been a major factor in bringing the Chinese economy back to life after a sudden stop this spring. But leaning on households again will compound financial vulnerabilities already evident in China, something that Beijing may come to regret.
Write to Mike Bird at [email protected]
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