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Thursday, March 29,
2018 /07:55 AM / Fitch Ratings
The continued rapid rise of China's household debt
burden could provide the authorities with more time to rein in corporate
leverage without jeopardising growth targets, but would not resolve the
economy's underlying reliance on credit and may create medium- to long-term
risks of its own, says Fitch Ratings.
Bank lending to households has expanded by a
compounded average of 20% a year since 2011. It has become a particularly
important driver of economic growth in the past year, as it has continued to
rise strongly even as regulatory scrutiny of shadow banking and interbank
activity has tightened credit conditions for the corporate and financial
sectors. Indeed, household debt became the largest component of new credit in
the banking system for the first time in 2017, accounting for more than half of
new loans.
The run-up in household leverage over the previous
decade has been from a low base and partly reflects financial deepening as the
economy and housing market have developed. We estimate that China's household
debt reached 82% of disposable income at end-2017, up from 31% at end-2008.
This remains below levels in most developed economies and suggests that any
near-term market concerns over China's household debt burden are probably
overblown.
However, China's household balance sheets do
appear more stretched than those in most emerging markets and the gap with
developed markets could narrow quickly if left unchecked. Fitch estimates that
the household debt-to-disposable income ratio could reach close to 100% by 2020
if current trends persist, effectively closing the gap with the US (105%) and
Japan (99%). Moreover, rapid growth in mortgage lending, which accounts for the
bulk of household debt, appears to contain pockets of speculative activity, as
highlighted in statements by senior government leaders.
Unabated growth in household debt could create
vulnerabilities in the financial system, particularly if coupled with looser
credit standards. So far, lending standards generally appear to have remained prudent,
while downpayment requirements have been tightened since mid-2016. The maximum
loan-to-value ratio is 70% for first-time buyers and many mortgages appear to
be originated under even tighter terms. That said, collateral valuation is an
important downside risk, given rapid price appreciation in the previous few
years. Some banks could eventually face rating action if loss-absorption
capacity is not increased to reflect rising risks related to household lending.
The Chinese authorities would almost certainly use
policy levers to stabilise the housing market in the event of a downturn,
although such a scenario is currently well outside Fitch's baseline forecasts.
For example, housing purchase restrictions could be rolled back and there is
considerable room to lower payment requirements. Other policy measures that
directly influence prices or supply-demand dynamics are also possible, since
policymakers appear to be increasingly treating housing-market stability as systemically
important. However, heavy intervention could dull the role of market forces and
the utility of price signals across the economy over the longer term, and may
not necessarily achieve the desired effects in the short-run. 
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