Box A Household Sector Risks in China
The growth and level of corporate debt in decline in interest rates in China over the China has received significant attention, but 2010s have also raised households’ ability to household debt has also grown rapidly, albeit service debt. The increase in debt has also from a much lower base. The rise in been accompanied by a sharp rise in housing household debt over the past decade is prices. notable because it can negatively affect both Mortgage debt has been the biggest driver [1] financial stability and economic growth. of the increase in household debt over the This Box assesses the direct risk that past decade, and now accounts for around household debt poses to the financial system half of household debt in China (Graph A.2). in China. Credit card debt has also risen strongly. Household debt in China has grown at an Growth in personal business loans has been average annual rate of more than 20 per cent less pronounced, but these loans still account over the past decade. As a result, the ratio of for around 20 per cent of household debt. household debt to GDP has increased Growth in some riskier types of household sharply, from about 20 per cent in 2009 to debt not measured in official household debt around 55 per cent currently (Graph A.1). This statistics, such as peer-to-peer (P2P) and ratio is lower than in most advanced other online lending, has been particularly economies, but is higher than in many other strong in the past few years, although it has large emerging market economies. Further, slowed recently after the Chinese authorities the ratio of household debt to household tightened regulation of this lending. disposable income is higher relative to other countries, because household income is a low share of GDP in China. This ratio reached 112 per cent in 2017, up from 43 per cent in 2008, and is now comparable to the United Graph A.1 States, Euro area, Japan and the OECD Household Debt [2] Per cent of GDP average. % % The increase in household debt reflects the 90 90 rapid process of financial deepening US UK following reforms that were in part designed Japan to increase household consumption as a 60 60 share of economic activity in China. These Euro area China 30 30 included the privatisation of the housing Emerging markets* stock and introduction of mortgages in the 0 0 1990s and ongoing financial deregulation. 1994 1999 2004 2009 2014 2019 * Weighted average of selected emerging market economies The increase in household income and a Sources: BIS; RBA; Refinitiv
FINANCIAL STABILITY REVIEW – OCTOBER 2019 19 Risks to the financial system from Loans to households are a moderate household debt have risen share of banks’ assets The sharp rise in household debt in China In China, lending to households is mainly suggests that the risks to households and the facilitated by banks. Household credit has financial system have increased, although risen strongly as a share of banking assets to household debt is still only one-third of the almost 20 per cent (Graph A.3). Within the size of corporate debt in China. Higher debt banking system, state-owned banks provide makes households more vulnerable to around half of credit to households. However, adverse shocks, such as a fall in income, this share has declined in recent years higher interest rates, or falls in housing prices. because loans from some types of smaller More generally, rapid growth in debt has banks have grown more rapidly. Overall, often been found to signal heightened risk of loans to households in China are still a financial crisis.[3] This is because rapid credit smaller fraction of banks’ total assets than in growth can coincide with weaker lending advanced economies.[4] Risk weights on standards, and frequently with excessive residential mortgages in China, at around increases in asset prices, which can reverse 50 per cent, also tend to be higher than in suddenly. advanced economies, implying that banks The direct risks to the financial system from hold larger capital buffers. This suggests that household debt depend on the size of there would have to be relatively high rates lenders’ exposures relative to their balance of default, and loss-given-default, on loans to sheets, the likelihood of households households to threaten banks’ solvency. defaulting and lenders’ losses in the event of A key determinant of loss-given-default is the default (loss-given-default). These elements extent to which loans are collateralised. For are explored below, firstly from the housing loans, this depends on loan-to- perspective of lenders’ exposures and loan valuation ratios (LVRs). In 2017, LVRs at characteristics, and then from the origination in China averaged around perspective of the characteristics of 60 per cent.[5] This is consistent with the borrowers. imposition of maximum LVRs by authorities of 80 per cent for first homes and 70 per cent for second homes, with some city and Graph A.2 provincial authorities imposing lower caps. In China – Household Debt practice, current LVRs for outstanding loans Per cent of nominal GDP are likely to be lower still, because housing % Mortgage % Personal business prices have risen significantly in recent years. Credit cards Other* Total Accordingly, LVRs in China appear to be low 40 40 in absolute terms, and comparable to those in other countries, which somewhat
20 20 mitigates the risk of loss to lenders. Lenders’ loss-given-default also depends on the ability to take control of and liquidate 0 0 2009 2011 2013 2015 2017 2019 collateral, and pursue debtors more generally. * Other debt includes car loans and personal loans Source: CEIC Data Mortgage loans in China are full recourse,
20 RESERVE BANK OF AUSTRALIA meaning that defaulting borrowers remain households, this suggests that household liable when the proceeds from the sale of debt is more concentrated among home their home are less than the outstanding buyers, and that LVRs are higher, than the balance on their loan. In principle, this should mortgage data indicate. This raises both the reduce the risk of losses for lenders. More probability of default and the size of losses to generally, it should also discourage bank lenders in the event of default. borrowers’ risk-taking and reduce the The risks to lenders also depend on incentive to default. However, liquidation of downside risks to housing prices, given the collateral and asset seizures may not always importance of housing as collateral. Large be straightforward in China for legal and price falls would both reduce household [6] other reasons. The net effect of these two equity buffers and raise the likelihood of opposing influences on lenders’ ability to default, because distressed households pursue full repayment, and so their loss- would be less likely to be able to sell their given-default, is uncertain. The effect on property to fully repay their loan. Housing lenders’ and borrowers’ willingness to make prices in China have risen rapidly over recent and take on riskier loans is also unclear. years and are generally seen as high relative Until mid 2018, household borrowing via to incomes. An element of speculative non-bank channels, including P2P and other activity has likely been a driver of this growth, online lending platforms, had been raising the spectre of overvaluation and increasing rapidly. This is likely to be riskier – possible large price falls. In particular, for borrowers, lenders and the financial investors may be more likely than owner- system – than traditional bank lending. In occupiers to sell their properties in a particular, non-banks are subject to less downturn, amplifying any fall in prices. In regulatory oversight, so lending standards response, authorities have forced banks to and both lender and borrower resilience can tighten their lending standards and have be weaker. There is also some evidence that imposed sale and purchase restrictions in a households have been using non-bank large number of cities over recent years, channels – as well as personal bank loans – to especially for second and third dwellings. This finance housing deposits. While still a appears to have slowed the increase in relatively small part of borrowing by prices. More generally, the Chinese authorities have displayed a willingness over the past decade to employ policy measures Graph A.3 to prevent large housing price falls, which China – Banks’ Claims on Households % % Share of banks’ assets Share of credit to households reduces the risk to lenders.
State-owned banks 20 50 Household debt is concentrated among high-income households Total City and rural banks* Risks to the financial system from household 10 25 debt depend on households’ ability to Joint-stock banks service and repay their debts. At present, 0 0 households seem to be having little difficulty 2011 2015 2019 2011 2015 2019 * Includes cooperatives meeting their financial obligations. The Source: CEIC Data
FINANCIAL STABILITY REVIEW – OCTOBER 2019 21 available data suggest that the non- income) are higher than some advanced performing loan (NPL) ratio for household economies. As noted above, most debt is loans remains low at 1.5 per cent.[7] In owed by high-income households, who are assessing the risks from household debt, it is better placed to support high DSR ratios important to take account of the distribution since a smaller share of their income is of the debt across households. For example, if needed for essential items like food. Further, most debt is owed by high-income and high- interest payments take up more than wealth households, it poses less risk to 40 per cent of disposable income for only lenders because these borrowers are better around 15 per cent of households in the top able to repay. two income quintiles.[11] In contrast, interest Survey estimates suggest that household payments take up more than 40 per cent of debt is concentrated in a relatively small disposable income for just over half of share of Chinese households. Only around indebted households in the bottom income 15 per cent of Chinese households quintile, up from around one-fifth in 2011 participate in formal debt markets, although (Graph A.4). These households appear the use of informal channels, such as significantly more vulnerable than high- borrowing from family and friends or online income households, but they account for non-bank lenders, means that the share of only a small share of household debt and so households with some form of debt is likely are a limited risk to the financial sector. to be somewhat higher.[8] For the household sector as a whole, the Household debt is concentrated among debt-to-asset (DTA) ratio is very low. The low high-income and high-wealth households, as ratio is consistent with the high household it is in many other countries. For urban saving rate in China, which has resulted in a households, around three-quarters of debt is large accumulation of both property and owed by households in the top two income financial assets. Survey evidence suggests quintiles. Only around 10 per cent of debt is that the DTA ratio for indebted households is [12] owed by households in the lowest income still relatively low at around 15 per cent. quintile.[9] Similarly, households in the richer Further, only around 2 per cent of indebted coastal provinces tend to be more indebted. households in the top two income quintiles, The concentration of debt implies that those households with debt have much higher Graph A.4 debt-to-income (DTI) ratios than the China – Households with High Interest Payments* Share by income quintile** aggregate figures suggest. Indeed, the IMF % % 2015 estimates that almost half of all household 2013 2011 debt in China is owed by households with a 50 50 DTI ratio greater than four.[10] However, household income growth remains rapid in
China, which will help households service 25 25 and ultimately repay their debts.
In aggregate, debt-service ratios in China 0 0 1st 2nd 3rd 4th 5th
(DSRs; required principal and interest * Interest payments greater than 40 per cent of disposable income ** The 1st income quintile is the lowest income quintile payments relative to household disposable Source: CHFS
22 RESERVE BANK OF AUSTRALIA and 7 per cent of those in the lowest income relatively high levels of capital against quintile, are estimated to have more debt housing loans, and households seem to have than marketable assets. Almost all considerable equity buffers (albeit likely households should then be able to sell their smaller than available data suggest). assets to repay their debt if they needed to Nonetheless, pockets of vulnerability exist, because of a shock to their income or with some households having quite high DTI expenses. However, the share that do not and DSR ratios. Further, higher household have enough assets to cover their debt debt may pose risks to the macroeconomy. In would obviously increase if asset prices were particular, international experience suggests to fall. that high levels of household debt can amplify income and wealth shocks. In Overall risks appear contained response to negative shocks, indebted The rapid growth of household debt, to a households can cut back spending by more relatively high level given China’s stage of than non-indebted households, even if the development, is a risk for the Chinese banking system remains resilient. Policy- financial system. Rapid lending growth may makers have implemented a range of have resulted in some poor quality loans. prudential policies in response to these risks. However, overall the risks seem contained at More generally, the Chinese authorities have present. The debt is concentrated among also shown a willingness to support high-income households, loans to households in ways that are not common in households still comprise a fairly small share advanced economies. Nonetheless, ongoing of banks’ assets, banks are required to hold strong growth of household debt may suggest a further build-up of risk.
Endnotes [1] A growing literature suggests that higher [4] See IMF (2017), Household Debt and Financial household debt can lead to slower future growth Stability, Global Financial Stability Report, October, in consumption spending and GDP (see p 74. Drehmann M, M Juselius and A Korinek (2017), [5] People’s Bank of China, loc. cit. ‘Accounting for Debt Service: The Painful Legacy of Credit Booms’, BIS Working Papers, No. 645). [6] There are some protections for debtors built into Recessions can also be deeper when the the law. For example, debtors may be able to pay preceding boom involves higher-than-normal their obligation in instalments and can keep a credit growth (including to households; for minimum level of assets that allows them to take example see Mian A, A Sufi and E Verner (2017), care of themselves and their families. See IMF ‘Household Debt and Business Cycles Worldwide’, (2019), ‘People’s Republic of China: Selected The Quarterly Journal of Economics, 132(4), Issues’, IMF Country Report No. 19/274, p 25. pp 1755–1817). [7] However, this is likely to be a lower bound. For [2] People’s Bank of China (2018), ‘Financial Stability example, some loans in arrears for more than Report’, p 48. 90 days may be classified as ‘special mention loans’, although banks have made progress in [3] For example, see Schularick M and AM Taylor recognising such loans as NPLs, after the (2012), ‘Credit Booms Gone Bust: Monetary Policy, authorities tightened NPL recognition standards. Leverage Cycles, and Financial Crises, 1870–2008’, Some analysts also suggest that some NPLs have American Economic Review, 102(2), pp 1029–61.
FINANCIAL STABILITY REVIEW – OCTOBER 2019 23 been moved off banks’ balance sheets or [10] IMF (2019), ‘People’s Republic of China: Selected repackaged as ‘investment receivables’ to avoid Issues’, IMF Country Report op. cit., p 20. However, recognition. alternative survey evidence suggests that the [8] See Funke M, R Sun and L Zhu (2018), ‘The Credit share of highly indebted households may be Risk of Chinese Households: A Micro-level much lower (see Funke M, R Sun and L Zhu, loc. Assessment’, BOFIT Discussion Paper No 12/2018. cit. [9] Gan L (forthcoming), based on findings from the [11] Funke M, R Sun and L Zhu, loc. cit. 2017 wave of the China Household Finance [12] Gan L (forthcoming), based on findings from the Survey. 2017 wave of the China Household Finance Survey.
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