Marginal Borrower’s Household Debt to Income Exceeds 100pc
Balding’s World: Reconciling Chinese Household Debt Statistics
So after my Bloomberg View piece came out citing a self generated statistic that Chinese household debt to household income was above 100%, I had a number of eagle eyed reader send me a piece from the South China Morning Post from the same day. In the SCMP piece, they present a graph that shows Chinese household debt to household disposable income at just above 50%. Readers were wondering how could I explain the enormous discrepancy between my self generated number and the number that was cited in the SCMP.
The Bloomberg piece he references: China Shuffles Its Debt Around. The heart of the issue:
In other words, China is spreading the debt burden from corporations to households. Although this might forestall a domino effect should one of China’s big companies start teetering, it’s far from a long-term solution.
But which households? SCMP: How China’s young people became addicted to debt
Think about Chinese household debt in terms of demographics and the marginal borrower. Aunties aren’t loading up on debt in their 50s. Retired people aren’t borrowing to buy new cars. It’s the Chinese Millennials (80后，90后) who are loading up on debt. If you’re looking at debt in terms of the Chinese population and comparing it to a developed market, it’s not apples to apples because the older generations in China have far less debt. Thus, while it would be statistically correct in the aggregate to say,
The consumer market has the capacity to service higher debt. Household debt-to-disposable income is 56 per cent, which is also among the lowest in the world. For context, the US peaked at 123 per cent, and Australia is now at a worrying 168 per cent.
China could double its household debt ratios and still be “average” in a global context. Admittedly, this is a multi-year process, but with an US$11 trillion economy, this implies an additional US$4 trillion in purchasing power in today’s terms.
the marginal borrower will exhaust themselves long before this peak is achieved.
A day ago I posted another SCMP article showing the deflationary impact of high debt levels is already hitting some consumers: Housing Bubble Turns Chinese Into Debtors
Cao and her husband are rich on paper: their flat is now worth more than 5 million yuan, but they still live in a frugal life. They’ve let the flat out 6,000 yuan a month and she lived with her husband at his army quarters. To make sure they can repay their debts and make ends meet, she has minimised discretionary spending on restaurant meals, clothing and travel.
Finally, from that article is this key point:
total outstanding deposits minus total outstanding loans, have stagnated or even begun to fall
The marginal borrower is exhausted. Deflationary/disinflationary forces are building.