Rising household debt in China could threaten growth and financial stability, Fed economists warn

Jed Jacobsohn / Getty Images
  • Household debt in China has been rising over the last decade.
  • It could pose risks to growth and financial stability, according to economists at the Federal Reserve Bank of New York.
  • Beyond the second-largest economy, the situation could shed light on how credit booms in emerging markets may play out.

After outpacing corporate borrowing last year, household debt now makes up about half of new loans in China. And its steady rise has cast uncertainty on growth and financial stability in the world’s second-largest economy, according to economists at the New York Federal Reserve.

“Overall, the risks related to household debt in China are generally viewed as manageable by most observers,” economists Hunter Clark and Jeff Dawson said in report out Wednesday. “However, it is important to caution against being overly sanguine, especially since aggregate measures of debt and income may mask important differences among households.”

The household debt-to-gross domestic product ratio is currently at around 50%, the Fed report said, increasing by nearly 30 percentage points over the last ten years and higher than most emerging-market economies outside of Asia. Compared with households’ disposable income, that ratio nearly doubles.

Crowding out consumption and investment, worsening household balance sheets could add to a wave of existing growth concerns in China. At a national level, it could limit stimulus measures aimed at countering a slowdown. For households, debt service obligations can mean less money to spend.

“The impact on growth and consumption dynamics of household debt are complex, but some research suggests that fast increases in household debt entail trade-offs between faster, near-term GDP growth and slower growth in the future,” Clark and Dawson said.

Screen Shot 2019 02 13 at 2.02.25 PMNew York Fed

Household debt has also cast uncertainty on the health of China’s banking sector. In a 2017 report, the International Monetary Fund said increased household debt could amplify the macroeconomic consequences of negative shocks.

“This means that deterioration in the balance sheets of these households could have an amplified negative impact on the banking sector as well as on the macroeconomy, even though loans to households, including home mortgages, in China are still a smaller fraction of banks’ total assets than in advanced economies,” the IMF said.

China could serve as a bellwether of sorts for how relatively high levels of household debt might affect other emerging markets, according to Adam Slater, an economist at Oxford Economics.

“How China’s debt boom plays out is key to the overall story of how the EM credit boom of the last decade resolves itself,” he said. “There are risk areas in China – household debt levels are looking elevated by EM standards and shadow bank lending is a possible problem area.”

The map below, compiled by the IMF, shows household debt-to-GDP ratios around the world.

Screen Shot 2019 02 13 at 2.28.30 PMIMF

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