Source: CBN

As frugality in household management and saving money against rainy days have always been viewed as virtues in traditional Chinese culture, the high level of household savings has served as an important foundation for China’s investment-driven economic growth. However, with the surge of real estate prices and the rise of the loan-based consumer culture, China has seen a fast increase in the leverage ratio of the household sector.

According to data from the National Institution for Finance & Development, as of the end of 2014, China’s social-wide leverage ratio (the ratio between the total national debts and GDP) reached 236%, and the leverage ratio of the household sector, governmental sector, financial institutions and non-financial enterprises (the ratio between the debts of each sector and GDP) was 36%, 58%, 18% and 123%, respectively. Apparently, the leverage ratio of the household sector is much lower than that of non-financial enterprises and the governmental sector, and it seems there is nothing to be worried about. However, the leverage ratio of China’s household sector doubled from 18% in 2008 to 36% in 2014. The growth speed is far higher than that of non-financial enterprises and the governmental sector.

More worrying, as China’s real estate market saw a new wave of price hikes from the latter half of 2015 to 2017, China’s household leverage ratio continued to climb fast. For example, as of the end of 2016, financial institutions reported RMB33 trillion of creditor’s rights against the household sector, and its ratio to the GDP of the year increased to 45%.

Some consider that although the leverage ratio is 45%, China’s household sector still has room for further leveraging, given the fact that both the US and Japan see the leverage ratio of the household sector stand at 70%-80%. However, comparing household debts with GDP is just a means to measure the household leverage ratio. We can also use two other means to judge it, with one as the ratio between household debts and household income, and the other as the ratio between household debts and household liquidity assets (the deposits from residents can be made the metric to measure household liquidity assets in the narrow sense).

When we divide the creditor’s rights of financial institutions against the household sector by the disposable income of China’s household sector, the ratio climbed from 46% in 2007 to 77% in 2015, and almost rose by 10 percentage points every two years during 2010-2015. If the calculation is based on the growth speed, the ratio between household debts and the disposable income of the household sector may reach 87% at the end of 2017. Given the fact that the ratio in either the US or Japan is around 100%, the room for further leveraging in China’s household sector is not big from the perspective of the ratio between debts and income.

In China, the ratio between household loans and household deposits has risen from 25% in 2007 to more than 60% at present, and the ratio between the newly increased household loans and newly increased deposits every year soared from an annual average of 50% during 2005-2007 to 97% during 2014-2016. In 2016 there was lso a phenomenon that the increment of household deposits was lower than of household loans. In other words, the room for further leveraging in China’s household sector is increasingly limited from the perspective of the ratio between debts and liquidity assets in the narrow sense.

We must point out that the said calculations are all based on data about total quantities. In fact, the distribution of the leverage ratio in China’s household sector is seriously unbalanced. For example, the leverage ratio of rural households is very low, so, the leverage ratio is concentrated in cities. In another example, as the ratio between house prices and income in first and second-tier cities is much higher than that in third and fourth-tier cities, the leverage ratio of residents in first and second-tier cities may be significantly higher than that in third and fourth-tier cities. If we take into account the fact that young people in cities generally borrow money from parents, relatives and friends, other than bank loans, to buy houses, the real leverage ratio of the young families will be prohibitively high. In general, the middle-class young people in first and second-tier cities, who are compelled to lend money in various forms, are very likely to be the group with the highest leverage ratio in Chinese society, and the most financially vulnerable as well.

We earlier pointed out that it’s short-sighted and dangerous to help the business sector deleverage by activating asset prices (including those in the stock market and house market) and stimulating further leveraging by the household sector. Given the unbalanced income distribution in China’s household sector and the huge gap among the house prices in cities of different tiers, simply comparing the household leverage ratio in China with those in developed countries is worth discussing. The efforts the Chinese government has recently made to reduce the bubbles in asset prices, by intensifying financial regulation and curbing house price growth by strengthening regulation in various aspects, are worthy of praise, but there are still uncertainties facing the move to build a long-term mechanism for regulation.

As systematic financial risks rise and financial risks become more explicit, it will be a challenge every middle-class family will have to face in the future, to overcome the anxiety about the preservation or appreciation of asset values (the delusion that “nonparticipation will lead to asset devaluation”), to reasonably allocate assets based on actual conditions and avoid excessive use of financial leverages.

(The author is a part-time researcher of Shanghai Academy and researcher of the Institute of World Economics and Politics of CASS)