- Household loans halved year to date, caused by a contraction in credit demand rather than supply
- Household deleveraging curtails spending as falling debt ratios…
- … are accompanied by higher saving rates
- Elevated savings would risk backpedaling the rebalancing efforts towards consumption-driven growth
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Debt shunning by Chinese households is holding back recovery. During the Jan-Aug period, new household loans halved to RMB2,76tn from a year earlier. Of which, long-term loans plunged 54%yoy to RMB1,974bn while short-term lending dropped 40%yoy to RMB786bn. Measures such as lowering mortgage and vehicle loan rates had minimal impact so far. Evidently, the weak credit impulse is rather a result of declining borrowing willingness than tightening lending constraints.
This may indicate a reverse in the strong leverage buildup since 2009. The ratio of household debt-to-income more than doubled to about 140% in the decade before the pandemic. The rise in part reflected credit innovation, but more attributed to overly optimistic expectation on ever rising home prices. Much of household debt growth came in tandem with rising mortgage liability. The sharp decline in net household deposit-to-GDP ratio during 2009-11 and 2015-17 corresponded with surging home prices. Such unrelenting uptrend has now run into the buzzsaw of property woes. Home prices fell for the 12th consecutive month in August, with the trend appearing to continue amid slower urbanization and population growth.
Average households have witnessed their net worth shrink as home values fell, and the resultant negative wealth effect crimped spending. Meanwhile, declining house values trimmed home equity-based borrowing thereby depressing consumption. An astonishing 40% of Chinese household wealth is now tied up in real estate, almost twice the share for the US counterpart (24%).
The ongoing household deleveraging also reflects changes in expectations of future income. PBOC’s latest surveys suggest households are more pessimistic about their future earnings than they were when the pandemic started in 2020 and during the global financial crisis. The resultant rise in precautionary savings is remarkable. Household deposits amassed RMB10.8tn during January-August, the largest jump on record. Mirroring this is a slide in the velocity of money. Dimmer income prospects had pronounced impact in durable goods purchases, which usually requires borrowing and repayment of loans in the future. This explains why vehicle sales, for instance, remain well below pre-pandemic levels.
Evidence abounds about the dampening effect of deleveraging on consumption. In the US, where debt-to-income ratios have fallen by about 30%ppt since 2007, household deleveraging appears to be the culprit for the notable slowdown in consumption in the wake of the GFC. The experience in Japan following the bursting of the asset bubble in the 90s also suggests a sizeable debt reduction led to prolonged dampening on consumer spending.
Timely policy initiatives are thus warranted to reverse or smooth deleveraging by the Chinese household sector. The growing reluctance to spend and take on more debt may otherwise offset any pickup in investment-led growth engineered by fiscal stimulus. Continued high savings would risk backpedaling the rebalancing efforts towards consumption-driven growth.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
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