The household debt ratio is not a cause for concern


A real estate model attracts visitors to an industrial exhibition in Dongguan, Guangdong Province. [Photo by An Dong / For China Daily]

Household debt is closely linked to financial risk. The subprime mortgage crisis in the United States in 2008 made it nearly impossible for many American families with low credit scores to repay their home loans, which led to the global financial crisis whose negative impact on the global economy is always obvious.

When it comes to the level of Chinese household debt, expert opinions vary. Forty-eight percent of those polled by think-tank Tencent Financial Technology recently said they consider the overall debt level of Chinese families to be relatively high, while 39 percent said it was moderate and 8% said it was relatively weak.

The ratio of Chinese household debt to GDP does not appear to be too high. Although house prices in many Chinese cities have stabilized or even declined in some, the high cost of real estate means that the majority of Chinese families are taking out mortgages to buy a home. At the end of 2017, the loan balance to Chinese households stood at 40.5 trillion yuan ($ 6.0 trillion), an increase of 21.4% year-on-year, which represented 49.3% of GDP. country that year. In any case, this is a relatively low level of debt compared to that of developed countries. In 2017, the US household debt-to-GDP ratio was 80%, and annual UK household spending exceeded annual income for the first time in three decades. In Germany and Japan, too, the ratio of household debt to GDP has exceeded 50%.

However, Chinese household debt has grown rapidly. In 2008, the ratio of Chinese household debt to GDP was only 17.9%, which means that it increased by more than 30 percentage points in a single decade, mainly due to mortgages real estate.

For many families, the ratio of mortgage payments to household income is unreasonable. Once home loans represent an unreasonably high percentage of a family’s disposable income, the family risks defaulting on debt.

Thanks to the slowdown in economic growth and the transformation of the economic development model, some families are already facing financial difficulties. In addition, the risk of mortgage default can affect not only the sustainability of the financial sector, but also the livelihoods of many families. In general, home loans are the main concern of Chinese households, but household debt is more than just mortgage loans. Consumer loans, like auto loans, have also grown rapidly in recent years. Some have even taken out consumer loans to invest in the stock market or speculate in the real estate sector, creating more risk for household debt. If investments or speculation fail, families with stable incomes could also default on their debt.

In addition, some illegal fundraising has also caused household debt risk.

Since the ratio of Chinese household debt to GDP is relatively low compared to that of developed countries, the country can manage the risk of household debt as long as it takes comprehensive prevention and control measures. .

In particular, China should first take effective measures to promote steady growth in household income. Reductions in taxes and administrative costs targeting small and medium-sized businesses can go a long way towards achieving this goal. SMEs employ a relatively large number of people. Thus, reducing their tax and fiscal burden will promote employment and prevent families’ income from declining, which is very likely to trigger a loan repayment crisis.

In addition, policymakers should choose an appropriate macroeconomic policy to create a good business environment. Deleveraging is important, but the authorities must also be aware of the new risks it can engender. This is why it is important to adopt structural deleveraging, in which case a moderately accommodating monetary policy could guarantee abundant liquidity.

In addition, we must promote the healthy and stable development of the real estate sector. Promoting healthy housing market development is crucial, as high house prices will undermine the potential for economic growth, as well as the competitiveness of businesses and the economy as a whole.

Authorities should also take steps to impart financial literacy to people so that households can make informed decisions and prevent financial risks.

And the authorities should have a clear vision of household statistics work so that they can lay a solid foundation for preventing and controlling household debt risks.

The author is a researcher at the National Academy of Economic Strategy, Chinese Academy of Social Sciences. Opinions do not necessarily represent those of China Daily.

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John A. Bogar