Covid-19 uncovers China’s fast household debt accumulation and its risks

• Debt has always been a concern hovering the Chinese economy. For long, the goose that laid the golden eggs has been the abundant household savings and the low indebtedness, but things have changed. Household debt grew from 28% in 2011 to 55% in 2019 as a share of GDP with an average yearly growth of 19%. The coronavirus outbreak has only exacerbated an existing problem. Among different types of household debt, mortgages are the key component with an average annual growth at 22% from 2015 to 2019. In the past, higher mortgages mirrored China’s property boom, but the economic deceleration with weaker home price mean mortgages are mounted for different reasons.
• In this note, we address the future of mortgages under a stagnant housing market. We do not think financial stability risks related to mortgages are immediate for banks as they continue to be safer assets than credit cards and auto-loans. But the situation could deteriorate rapidly if the property market encounters a relevant negative shock. The risk is bigger for large banks as their share of mortgages to total loans surged from 20% in 2013 to 31% in H1 2018 while the ratio only increased from 11% to 16% for small and medium-sized banks.
• Another complicating issue is the relationship between banks and shadow banking. Mortgage securitization has been a vital part of asset backed securities (ABS) in China with a share of 29% in 2019. The higher relevance of ABS in mortgages implies risks related to a potential collapse of the housing market or a sudden and protracted shock to household disposable income are shared through wealth management products and investment plans, which form 42% of ABS holdings. While securitization dilutes the risk for banks, it makes the risk evaluation more complex, which is a lesson from the subprime crisis in 2008.
• The situation seems to be under control for now as the government keeps tight control on land supply, which has influence on home prices. However, an economic slowdown with higher awareness over the social cost of rocketed property prices implies downside risk exists for real estate. The future policy direction is financial regulators will be busy scrutinizing the exposure to mortgages at banks and beyond.
• Finally, the most immediate risk to financial stability stemming from household debt clearly lies on credit cards. Although the growth on short-term consumption loans have decelerated so far in 2020 and the delinquency rate has declined over years, the situation is likely to deteriorate due to the halt of economic activities caused by coronavirus, and more importantly household income.
• All in all, household debt issue in China has been mounting. While the risk to financial stability is not immediate as concerns the largest share of household debt, namely mortgages, stagnant housing prices and falling disposable income pose risks. But credit cards could be an immediate concern for banks, which could worsen banks’ asset quality under the currently negative economic environment.

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