Mortgage debt puts pressure on Chinese families, poses ‘systematic financial risks’: study

In the face of mounting debt, many Chinese families are now struggling to make ends meet, a study shows, noting the debt predicament for citizens has dragged down domestic consumption and would have repercussions for enterprise vitality and the country’s broader economy. Analysts believe the swift rise in Chinese household debt is mainly caused by mortgage loans.

The Institute for Advanced Research, a state-backed research institution affiliated to the Shanghai University of Finance and Economics, recently published a study titled “Household Debt Dilemma and Systematic Financial Risks that May Arise”, reckoning China’s household debt-to-disposable income ratio had gone beyond developed country levels to reach 107.2 percent by the end of 2017, nearing the peak level of the US right before the 2008 financial crisis.

The report stressed that while China had succeeded in curbing debt accumulation by state-owned corporations and local governments, potential risks posed by sharply ascending household debt was being ignored by authorities.

The overall ratio of household debt to GDP is the most widely used indicator of citizens’ ability to service debt. By the end of 2017, the ratio was 48 percent in China, well surpassing the levels of other developing countries, according to the study.

Although the absolute level is not so high, its quick growth is notable. Over the past decade from 2008 to 2016, the ratio surged from 18 percent to 45 percent and reached 48.97 percent in 2017. In comparison, it took nearly four decades in the US for the debt ratio to rise from 20 percent to 50 percent.

Until 2015, China was the world’s fastest-growing major economy, with growth rates averaging 10 percent over 30 years. Against this backdrop, with improved living standards, consumption loans have become popular among Chinese people who used to shun away from being in debt.

Along with the rise of consumer loans, home loans have become ubiquitous. “Mortgage payment has since been the biggest debt burden for Chinese families,” Chen Yanbin, vice dean of the School of Economics, Renmin University of China, told the People’s Daily.

“We’re suffering while enjoying,” a Beijing resident surnamed Li told the People’s Daily. He has been working in the capital city since graduation from college in 2010. Li and his fiancée bought an apartment in 2016 worth 3.1 million yuan at the time. “It’s a pleasant thing to have somewhere to live, but it’s also painful to pay back 10,000 yuan every month for 30 years,” he said. In top-tier cities like Shanghai, Guangzhou and Shenzhen, there are many young people like Li who’re under heavy burden of mortgage payment on a monthly basis.

Chen Yanbin indicated the steep rise in home prices in big cities has led to skyrocketing household debt in recent years. Although authorities’ strict regulation cooled the housing market last year, housing-related bank loans are still at high levels.

The People’s Bank of China has released a statistical report recently, elaborating to who the financial institutions have lent in the first half of 2018.

According to the central bank report, by the end of June, outstanding loans of all banks scaled at 129.15 trillion yuan, increasing 12.7 percent year-on-year, among which, the home loans for individuals reached 23.84 trillion yuan, marking an annual growth of 18.6 percent.

During the same period, the total amount of personal bank savings was 69.51 trillion yuan, which made the ratio of mortgage loans to deposit 34.29 percent. With the total bank loans for individuals being 44.13 trillion yuan, the loan-to-deposit ratio was 63.48 percent.

The official ratio of household debt to GDP only counts loans from financial institutions while many Chinese families also resort to private lending from their relatives, friends, or online peer-to-peer platforms. Although debt from these sources would not bring systematic financial risks, it will increase the financial burdens on individual borrowers.

Considering a large amount of debt is not recorded in bank books, Chen Yanbin and his research team are concerned the traditional indicators may underestimate the severity of China’s household debt problem. And he noted the distribution of debt was quite imbalanced, with some families’ debt levels being really perilous now.

“Highly leveraged Chinese families mostly come from those top tier cities. Young and middle-aged people tend to borrow from banks, their parents, relatives, and friends to buy homes at high prices in the big cities. And the group is especially vulnerable to debt risks,” Caijing, a financial magazine quoted Zhang Ming as saying, who is a researcher with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

The report by the Institute for Advanced Research concludes that the problem of household debt has become severe, reached the tolerance limit, and dampened consumption for seven years in a row. “More seriously, the negative effect has spilled over into the corporate and financial sectors, while posing systematic financial risks to the broader economy,” wrote the report.     

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