The Chinese Household Debt Problem

    Chinese household debt is growing quickly.
    From a traditional viewpoint, China's debt to GDP ratio is significantly lower than OECD countries. This is true, but over the past weeks, China's financial regulatory bodies have issued concerns that Chinese household may be over-leveraged.

China household debt to GDP
Chart 1: China's household debt to GDP
world household debt to GDP
Chart 2: World's household debt to GDP

    The household debt in China is rising at a rapid speed. From 2014 to 2017, the debt to GDP ratio have risen by 11%. Such speed has beaten the household debt accumulation speed in US before the 2007 financial crisis. And according to the latest data by, current Chinese household debt to GDP ratio hits a record high at 53.2%.

    The biggest part of the household debt is housing loan. As the following chart 3 shows, the housing loan relative to household disposable income in China (red line) is surging at a dangerous slope.

Debt to disposable income
Chart 3: Debt to disposable income

    Another reason that contributes to China's household debt problem is policy. Since 2016, the Chinese government has issued a series of policies to encourage household's borrowing and spending on housing, automobile and healthcare. And today, younger urban Chinese citizens are inclined to make their consumption using credit rather than debit.

Total social debt
Chart 4: Total social debt

    Although China's household debt is not the biggest contributor to the total social debt, (as can be seen in Chart 4, corporate debt is the major contributor), it is important to understand that Chinese household deposit had long been the stable source of funding for banks. Facing a declining household saving rate, banks may find it harder to resort to this pool in times of liquidity problems.

    Also, it is believed that with a higher debt-to-income ratio, the household's marginal consumption rate will fall, and the industrial sector will eventually feel the pressure on its sales and profitability. Since the industrial sector is also heavily indebted, this could potentially lead to a crisis.



Scott Liu