China's household debt hits all-time high, sparking concerns of loan default

Photo: Caixin

China's household debt has hit an all-time high over the past few years, fuelling concerns of disastrous loan default.

According to the People's Bank of China (PBC), China's central bank, the debt has reached 35.6 trillion yuan as of August, with housing mortgage exceeding 20 trillion yuan.

A study by the National Institute for Finance and Development (NIFD) showed that China's household debt equated to 51 percent of Gross Domestic Product (GDP) in the second quarter this year, an increase of 2 percentage points from the end of 2017. Although the ratio is still behind that of the US and Japan at 79.5 percent and 62.5 percent respectively, the rate of growth is strong.

The International Monetary Fund (IMF) forecast that the number of Chinese households with less saving and more borrowing would continue to increase in the next five years. The country's saving-to-GDP ratio is expected to grow by 2 percentage points annually to reach 61.3 percentage points by 2023, while its savings-to-GDP ratio will decrease to 30.5 percent.

Rising household debt and slower growth of income are sparking concern that potential default risks will pressure lenders and further hurt the country's consumption, the key driver of growth in the world's second-largest economy.

As of the end of June, consumer loans increased 21 percent from the same time last year, while the growth of retail sales declined to 9.4 percent, a 15-year low.

"What is strange is that the fast expansion of consumer loans has failed to lead to a surge in consumer spending," Shanghai-based brokerage CIB Research said in a report.

In an effort to explain the phenomena, the report said, "It means that the money wasn't used for consumption."

Why do people borrow money?

According to financial news website Caixin, most of the loans are associated with housing and auto mortgages, which in essence are investments and have become rising burdens for Chinese citizens.

In many large Chinese cities, the housing price-to-income ratio is high, while income remains more modest. Increasingly, home buyers in these locations find themselves overextended financially.

The housing market, particularly in major urban areas, has continued to heat up over the past two decades mainly because of rapid urbanization and speculation.

As housing prices rise, buyers clamor to purchase property before the next price increase.

Although local governments have attempted to cool the hot market by placing restrictions on home purchases and adopting price caps, housing price is still increasing to some extent.

In Beijing, homes that went for an average of around 4,000 yuan ($580) per square meter in 2003 are now above 60,000 yuan ($8,600) per square meter.

It is estimated that property accounts for about 70 percent of urban Chinese families' total assets.

Who are borrowing money?

According to reports by multiple market research institutes, China's younger generation of consumers, especially men, are the main borrowers of consumer loans. They are more likely to borrow money than the elder generation.

Li Ming, 29, an ordinary worker at a new media company, took a loan of 290,000 yuan from several lending institutions since late 2017 to invest in virtual currency, an industry has struggled to generate income for investors due to recent volatility.

With a monthly income of 4,000 yuan, Li is facing heavy repayment pressure.

Zhao Le (pseudonym), 35, works in a financial company. In 2015, he borrowed 1 million yuan from Ningbo Bank and Jiangsu Bank, and then poured the money into the turbulent stock market. After losing 700,000 yuan, Zhao is still investing aggressively.

When asked whether he is under pressure to repay the debt, Zhao said: "I can take new loans to repay the old ones. Things will be better when the stock market rebounds."

"Young people have advanced consumption awareness and demand," said a report by Beijing-based Evergrande Institute. "But at the beginning of their career development, most of them may not be able to afford their demands, resulting in greater need for consumer loans."

Who is pushing consumer loans?

Despite increasing peer-to-peer lending platforms, major commercial banks are still the main enablers of China's fast expanding consumer loans.

A report by the NIFD showed that by the end of June, banks' consumer loans have exceeded 7.6 trillion yuan, up 30.3 percent from the same period last year and overtaking the growth of any other kind of lending.

Analysts pointed out that though bank executives have been alerted of the risks of consumer loans, they still continue to do the business to avoid lagging behind competitors.


Fast-expanding consumer loans have raised fears among many industry experts, with some of them fearing that China's subprime crisis might be evoked if the trend continues.

"No major risks don't mean risks are not accumulating," a bank employee said. "I'm worried that default risks are increasing as the expansion of consumer loans sector."

According to a report by Beijing-based Internet company Rong 360, 50 percent of lenders earn less than 5,000 yuan per month, which means most of them might be unable to make the repayment.

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