Chinese household debt has risen at an “alarming” pace as property values have soared, analysts have said, raising the risk that a real estate downturn could wreak havoc on the world’s second largest economy.
Loose credit and changing habits have rapidly transformed the country’s famously loan-averse consumers into enthusiastic borrowers.
Rocketing real estate prices in major Chinese cities in recent years have seen families’ wealth surge.
But at the same time they have fuelled a historic boom in mortgage lending, as buyers race to get on the property ladder, or invest to profit from the phenomenon.
Now the debt owed by households in the world’s second largest economy has surged from 28% of GDP to more than 40% in the past five years.
“The notion that Chinese people do not like to borrow is clearly outdated,” said Chen Long of Gavekal Dragonomics.
The share of household loans to overall lending hit 67.5% in the third quarter of 2016, more than twice the share of the year before.
But this surge has raised fears that a sharp drop in property prices would cause many new loans to go bad, causing a domino effect on interest rates, exchange rates and commodity prices that “could turn out to be a global macro event”, ANZ analysts said in a note.
While China’s household debt ratio is still lower than advanced countries such as the US (nearly 80% of GDP) and Japan (more than 60%), it has already exceeded that of emerging markets Brazil and India, and if it keeps growing at its current pace will hit 70% of GDP in a few years. It still has some way to go before it outstrips Australia, however, which has the world’s most indebted households at 125% of GDP.
The ruling Communist party has set a target of 6.5-7% economic growth for 2017, and the country is on track to hit it thanks partly to a property frenzy in major cities and a flood of easy credit.
But keeping loans flowing at such a pace creates such “substantial risks” that it could be a “self-defeating strategy”, Chen said.
China’s total debt – including housing, financial and government sector debt – hit 168.48 trillion yuan ($25 trillion) at the end of last year, equivalent to 249% of national GDP, according to estimates by the Chinese Academy of Social Sciences, a top government think tank.
China is seeking to restructure its economy to make the spending power of its nearly 1.4 billion people a key driver for growth, instead of massive government investment and cheap exports.
But the transition is proving painful as growth rates sit at 25-year lows and key indicators continue to come in below par, weighing on the global outlook.