Home Truths Are Holding Back China’s Consumers

(Bloomberg Opinion) -- China’s consumers have been tightening their belts, and the trend looks unlikely to reverse anytime soon.

Retail sales rose 8.2 percent in December from a year earlier, holding close to their slowest pace in 15 years, data released on Monday showed. Big-ticket items such as automobiles slumped 8.5 percent and communication appliances posted a 0.9 percent drop – testament to the falloff in demand that led iPhone maker Apple Inc. to blame China for cutting its revenue outlook earlier this month. 

Home Truths Are Holding Back China’s Consumers

Weakening consumer spending is an ominous sign for a government that’s looking for domestic demand to pick up the slack as it tries to wean the world’s second-largest economy off its dependence on export- and investment-led growth. And there’s an ironic familiarity in the reason for the consumer’s growing fragility: debt.

China’s household debt as a percentage of GDP surged to 53.2 percent in December, from 36 percent five years earlier, according to CEIC data. While that remains below the global average of 62 percent, it’s the pace of growth that has caused concern. China’s household debt levels are now at the high end for emerging markets, the International Monetary Fund noted in October.

“China’s household leverage often flies under the radar, but it should not,” Moody’s Investors Service said in a December report. For the past six years, China’s disposable income has increased at an average rate of 10 percent annually, versus a 20 percent increase in household debt, the ratings company said. The growth of average household debt accelerated to 26 percent in the past year.

The government has sought to rebalance the economy toward consumer spending after its infrastructure-heavy growth model led to a surge in debt. China’s total debt as a percentage of GDP reached 266 percent in 2017, according to Bloomberg Intelligence’s estimates, from 163 percent in 2006. 

Banks have responded by lending more to consumers. Loans to companies fell to 60 percent of the total for Chinese banks in the first half of last year, from 71 percent in 2009, according to CGS-CIMB Securities Hong Kong Ltd. analyst Michael Chang. Consumer loans accounted for 36 percent in the first six months of 2018 versus 20 percent in 2009. The majority of those were mortgages, which accounted for 27 percent of total loans.

Home Truths Are Holding Back China’s Consumers

The explosion of mortgage credit has been great business for banks. Home loans are much less likely to be money-losers than corporate advances, as we’ve noted previously. Down payments are at least 30 percent for first mortgages and as high as 80 percent for second ones, meaning defaults are unlikely. To top it off, there's no personal bankruptcy law in China. That means lenders can not only repossess the home but pursue all the borrower’s assets in the event of default.

Home Truths Are Holding Back China’s Consumers

However, there are mounting signs that the weight of debt is starting to crimp household budgets. Short-term consumer loans – largely credit-card borrowings – have been slowing. 

A stretched consumer doesn’t make for a spendthrift. Chinese wage earners have plenty of other anxieties that could encourage them to hold on to their cash, including increasing job insecurity as the economy slows and the trade war prompts companies to shift factories to countries such as Vietnam. The government’s crackdown on shadow banking and the shakeout among P2P lenders have also reduced the availability of consumer finance.

So far, Beijing has resorted to a drip-drip of  increased tax cuts, easier liquidity for banks, and even subsidies for purchases of fridges and cars. It may take a lot more than that to get China’s wallets back out in a big way.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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