Dangers of household debt must not be overlooked
While the structure of world power is experiencing radical changes, it is crucial to contain and mitigate potential risks that could threaten economic growth. Household debt needs more attention, as the main focus has been on the debts of local governments and businesses.
The total amount of household debt appears to be low, but it exists in many different social strata and regions. If we don’t deal with it carefully, household debt could become a serious risk.
Though China’s household debt was only 48 percent of GDP in 2017, it has surpassed the level of other developing countries. The growth rate of household income is far behind that of GDP growth, which is one major difference with other countries. So the indicators used to measure household debt need to fit the Chinese situation. By the end of 2017, the ratio of total household debt to disposable personal income hit 107.2 percent. This number is above the level in the US before the 2008 financial crisis.
The structure of China’s household debt has also diversified. Housing mortgages only increased slightly in 2017. But other types of loans, especially shortterm loans, increased rapidly last year. One reason for this is that families have to seek other ways to finance their home purchases due to the tighter controls on mortgages.
There is a difference in the loan-to-deposit ratios in various regions in China. Provinces with a heated real estate market or that have put more efforts into rebuilding poorer areas tend to have higher ratios. Therefore, the regional systemic risks need to be considered. One dangerous sign is that debt levels are sometimes high in provinces with lower disposable income.
Household debt can also affect consumption, in two contradictory ways. The positive effect is that borrowing allows for more spending. But on the other hand, since China has a less developed second mortgage market, which means fewer people take out loans against the value of their homes, higher debts can compromise consumption. Household debt has spillover effects as well. Aside from household consumption, household debt aggravates the problem of insufficient liquidity in the business sector and instability in the banking system.
Business risks can also drag down personal disposable income through salary reductions and lay-offs. Families with mortgages will suffer the most under this situation. The interaction between household and business debts will spill over into the banking system as well. If businesses cannot pay back their debts on time, or even become “zombie companies,” the risk will pass on to the banks, imperiling the stability of the banking system.
Mitigating the household debt issue will require continued structural deleveraging efforts along with other reforms. Deleveraging must cover more than just local governments and businesses – it must also cover households.
First, more attention should be paid to household debt and its detrimental effects. The issue should be publicized, so that families are aware of the problem. Individual income tax reform will also have to
Mitigating the household debt issue will require continued structural deleveraging efforts along with other reforms. Deleveraging must also cover households.
speed up in order to improve families’ disposable income and ease liquidity pressure.
Second, deeper reforms of financial institutions should be undertaken. Better credit and loan policies allow for more efficient allocation of financial resources, keeping businesses’ debts at a reasonable level. This will help to control the risk of businesses taking out excessive short-term loans.
Third, in the long run, China should enact factor market reform with greater determination and allow the market to play the key role in resource allocation. More openingup, wider market access and stronger intellectual property protection will further improve the investment environment in China.
The Chinese economy is facing a complex international environment and various uncertainties. It is vital to keep the opening-up promise, as it will push reform and turn challenges into opportunities. In this process, preventing and curbing risks will become top priorities. Curbing household, business and government debts can provide stability for the Chinese economy.
The article was compiled based on a report by the Institute for Advanced Research at Shanghai University of Finance and Economics. bizopinion@ globaltimes.com.cn