Chinese household debt is nearing breaking point, according to a research report published by a team at the Institute for Advanced Research, Shanghai University of Finance and Economics. The report makes a case for simultaneous structural deleveraging of all three sectors – government, corporate and household.
The usual household debt-to-gross domestic production (GDP) ratio does not apply in the case of China, where GDP growth has little relevance to household income growth. A better way is to look at the household debt-to-disposal income ratio, which stood at over 107 percent in 2017 – nearing that of America at the eve of the financial crisis, the report says.
Under a huge debt burden, families cut consumption, lowering total social consumption. Businesses have seen their sales adversely affected, and have had to take out loans to keep in business. This hampers efforts to cut corporate debt. If they perform badly, employees will unlikely expect a wage raise, and the banks will be on the lookout for risks of default, the report says. Thus, in deleveraging, the holistic impact must be considered.
The research team proposes cutting household, corporate and government debts in unison. The authorities must pay heed to the results of accumulated household debt, and accelerate personal income tax reform to increase the disposable income of households. More liquidity on the part of households will boost overall consumption and help businesses cut debt.
China’s financial system awaits further reform and better credit policies to improve efficiency in the allocation of financial resources. These will help businesses, households and local governments keep a reasonable level of leverage, according to the report.
In the long run, the country should advance market-oriented reform with greater determination, relax market entry to foreign capital, improve the business environment and strengthen protection of intellectual property rights. Policies should be made with foresight and coordination, the report adds.
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