Be Wary of Rapid Rise of Household Sector Leverage
Zhang Ming
/SOURCE : Yicai
Be Wary of Rapid Rise of Household Sector Leverage

(Yicai Global) Nov. 3 -- China traditional culture has always regarded thrift as a virtue. The high savings of household sector has always been the pillar sustaining China's investment-driven economic growth for a long time. However, over the past 10 years, with the soaring real estate prices and the rise of borrow-and-spend culture, the household sector leverage in China has shown a rapid upward trend.

According to data from the National Institution for Finance & Development, by the end of 2014, the leverage of the whole society in China -- the ratio of gross national debt to GDP, reached 236 percent, of which the leverage of household sector, government departments, financial institutions and non-financial enterprises, also referred to as debt-to-GDP ratio, were 36 percent, 58 percent, 18 percent and 123 percent, respectively. The leverage ratio of China's household sector is significantly lower than that of non-financial enterprises and government departments, so there seems to be nothing to worry about. Nevertheless, the household sector leverage was only 18 percent in 2008, which doubled in 6 years, its growth rate was much higher than that of non-financial enterprises and government departments.

Even more alarming is, as China's real estate market ushered in a new wave of price jump from the second half of 2015 to 2017, China's household sector leverage is still showing a rapid ascent. For example, by the end of 2016, the claims of financial institutions on household sector reached CNY33 trillion (USD4.9 trillion), representing a rise to 45 percent of the GDP that year.

One view is that even China's household sector leverage has reached 45 percent, but considering that of the United States and Japan, which are around 70 to 80 percent, it means that there is still room for further leverage in China's household sector. However, to compare the household sector debt with GDP is only one of the ways to measuring the household sector leverage. We can also adopt the other two options to measure it: one is to compare household sector debt with sector income; the other is to compare household sector debt with the liquid assets of the sector (household savings can be used as a narrow sense indicator to measure the liquid assets of residents).

If we are to divide the financial institutions' claims on household sector by the disposable income of that sector, we'll find that the ratio has been continually rising from the 46 percent in 2007 to 77 percent in 2015. Especially during the period from 2010 to 2015, the ratio increases almost 10 percentage points every two years. At this rate, by the end of 2017, the debt-to-disposable income ratio of China's household sector will probably stand at around 87 percent. In view of the current debt-to-disposable income ratios of U.S and Japan's household sector being just around 100 percent, therefore, from the debt-to-income perspective, there isn't much room left for China's household sector to increase the leverage.

The rate of Chinese household sector loans and household saving deposits has risen from 25 percent of 2007 to more than 60 percent currently. But the rate of Chinese household sector annual new loans and annual new deposits has risen from 50 percent of the years 2005-2007 to 97 percent of the years 2014-2016. Even in 2016, the increment of household deposits was less than that of household loans. In other words, from the perspective of the rate of liabilities and narrow sense liquid assets, the space of Chinese household sector to add leverage is more and more limited.

What must be pointed out is that the above estimation is based on the total data. In fact, there are severe unbalances in the leverage ratio distribution of Chinese household. For example, the leverage ratio of rural households is low, thus the households leverage ratio is mainly concentrated in urban areas. For another example, the housing-price-to-income ratio of first- and second-tier cities is much higher than that of third- and fourth-tier cities, which cause the household leverage ratio of first- and second-tier cities possibly significantly higher than that of third- and fourth-tier cities. Considering the middle-aged and the young people buy houses by borrowing from banks, but also from parents, relatives and friends, the actual leverage ratio of the young family could be very high. In another word, the middle-class young people in the first- and second-tier cities may be the group with the highest leverage ratio in China for they are forced to buy houses through all kinds of loans. Therefore, they have the most financial fragility.

The government has strengthened financial regulation to control asset price bubble by introducing all-round regulations and rules to curb rising house prices. This is commendable. However, how to establish a long-term mechanism on supervision and regulation still faces a certain degree of uncertainty.

Under an environment of systemic risk in the financial system, how to reasonably allocate assets and avoid overuse of monetary tools based on the self-practical conditions will be the challenges that each Chinese middle-class family has to face.

(Zhang Ming is the chief economist of Ping An securities, a researcher of Institute of World Economics and Politics, Chinese Academy of Social Sciences)

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Keywords: Household Sector Leverage , First-Tier City , Household , Income , PROPERTY