China’s Property Frenzy and Surging Debt Raises Red Flag for the Economy
Chinese household debt has risen at an alarming pace as property values have soared, 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 loan-averse consumers into enthusiastic borrowers.
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 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.
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.
While China’s household debt ratio is still lower than that of advanced countries, it has 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.
The government 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.
China’s total debt—including housing, financial and government sector debt—hit $25 trillion at the end of last year, equivalent to 249% of national GDP.
China wants 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 painful as growth rates sit at 25-year lows and key indicators continue to come in below par.
Authorities desperate to keep GDP growth steady have turned to consumers as a source of finance because many of the sources of capital through the banks and corporations are essentially used up.
Combined with a rise in peer-to-peer lending, with over ¥550 billion borrowed in the third quarter of 2016, the risks of speculative investment have risen.