Surg­ing home­owner loans in China raise alarms

Kuwait Times - - BUSINESS -

Chi­nese house­hold debt has risen at an “alarm­ing” pace as prop­erty val­ues have soared, an­a­lysts say, rais­ing the risk that a real es­tate down­turn could send shock­waves through the world’s sec­ond largest econ­omy. Loose credit and chang­ing habits have rapidly trans­formed the coun­try’s fa­mously loan-averse con­sumers into en­thu­si­as­tic bor­row­ers.

Sky­rock­et­ing real es­tate prices in ma­jor Chi­nese cities in re­cent years have seen fam­i­lies’ wealth surge. But at the same time they have fu­elled a his­toric boom in mort­gage lend­ing, as buy­ers race to get on the prop­erty lad­der, or in­vest to profit from the phe­nom­e­non.

Now the debt owed by house­holds in the world’s sec­ond largest econ­omy has surged from 28 per­cent of GDP to more than 40 per­cent in the past five years.

“The no­tion that Chi­nese peo­ple do not like to bor­row is clearly out­dated,” said Chen Long of Gavekal Drago­nomics. The share of house­hold loans to over­all lend­ing hit 67.5 per­cent in the third quar­ter of 2016, more than twice the share of the year be­fore.

But this surge has raised fears that a sharp drop in prop­erty prices would cause many new loans to go bad, caus­ing a domino ef­fect on in­ter­est rates, ex­change rates and com­mod­ity prices that “could turn out to be a global macro event”, ANZ an­a­lysts said in a re­cent note. While China’s house­hold debt ra­tio is still lower than ad­vanced coun­tries such as the US (nearly 80 per­cent of GDP) and Ja­pan (more than 60 per­cent), it has al­ready ex­ceeded that of emerg­ing mar­kets Brazil and In­dia, and if it keeps grow­ing at its cur­rent pace will hit 70 per­cent of GDP in a few years.

The rul­ing Com­mu­nist party has set a tar­get of 6.5 to 7 per­cent eco­nomic growth for 2017, and the coun­try is on track to hit it thanks to a prop­erty frenzy in ma­jor cities and a flood of easy credit.

But keep­ing loans flow­ing at such a pace cre­ates such “sub­stan­tial risks” that it could be a “self-de­feat­ing strat­egy”, Chen said.

Trans­fer­ring risks

China’s to­tal debt-in­clud­ing hous­ing, fi­nan­cial and govern­ment sec­tor debt-hit 168.48 tril­lion yuan ($25 tril­lion) at the end of last year, equiv­a­lent to 249 per­cent of na­tional GDP, ac­cord­ing to es­ti­mates by the Chi­nese Acad­emy of So­cial Sciences, a top govern­ment think tank. China is seek­ing to re­struc­ture its econ­omy to make the spend­ing power of its nearly 1.4 bil­lion peo­ple a key driver for growth, in­stead of mas­sive govern­ment in­vest­ment and cheap ex­ports. But the tran­si­tion is prov­ing painful as growth rates sit at 25-year lows and key in­di­ca­tors con­tinue to come in be­low par, weigh­ing on the global out­look.

Au­thor­i­ties “des­per­ate” to keep GDP growth steady have turned to con­sumers as a source of fi­nance be­cause “many of the sources of cap­i­tal through the banks and cor­po­ra­tions are es­sen­tially used up”, An­drew Col­lier of Ori­ent Cap­i­tal Re­search told AFP. In­di­vid­u­als have turned to pawn shops, peer-to-peer net­works and other in­for­mal lenders to bor­row cash against as­sets such as cars, art or hous­ing, he said, to spend it on con­sump­tion. Banks are also driv­ing the phe­nom­e­non, An­drew Polk of Med­ley Global Ad­vi­sors told AFP. “Banks have been push­ing peo­ple to buy houses be­cause they need to make loans,” he said, as cor­po­rate bor­row­ing has dried up. Com­bined with a rise in peer-to-peer lend­ing, with over 550 bil­lion yuan bor­rowed in the third quar­ter of 2016, the risks of spec­u­la­tive in­vest­ment have risen, S&P Global Rat­ings said.

Some an­a­lysts ar­gue that China is well po­si­tioned to man­age these risks, and has plenty of room to take on more lever­age as fam­i­lies still save twice as much as they bor­row, with some 58 tril­lion yuan in house­hold de­posits, ac­cord­ing to Ox­ford Eco­nom­ics.

“From an over­all per­spec­tive, house­hold debt re­mains in a safe range,” Li Feng, as­sis­tant di­rec­tor of the Sur­vey and Re­search Cen­ter for China House­hold Fi­nance in Chengdu, told AFP, adding that risks over the next three to five years were mod­est. But Col­lier said that credit-fu­elled spend­ing was a “risky game”, be­cause when cap­i­tal flows slow, prop­erty prices are likely to col­lapse, par­tic­u­larly in China’s smaller cities. That could lead to de­faults among prop­erty de­vel­op­ers, small banks, and even some town­ships.

“That will be the be­gin­ning of a cri­sis,” he said. “How big this be­comes is un­clear but it’s go­ing to be a dif­fi­cult time for China.” — AFP

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