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Surging household debt clouds Asia's growth outlook

Borrowers pinch pennies even as governments try to spur spending

China's efforts to keep the economy growing by encouraging the purchase of homes has increased household debt and is beginning to weigh on consumption.    © Reuters

TOKYO/SHANGHAI -- The rapid expansion of household debt in emerging Asian countries, particularly China, has become a risk to the global economy.

In Thailand and Malaysia, debt has ballooned due to booms in the auto and housing markets, and the growing repayment burden has dampened consumer sentiment. In China, household debt as a percentage of nominal GDP is now over 50%. Countries such as Thailand have begun curbing their consumption in response to rising debt levels.

The U.S. Federal Reserve is expected to cut interest rates at the end of this month. Emerging economies also have room for interest rate cuts, which would boost growth in the short run but could deepen the scars from indebtedness over the long term.

Somprawin Manprasert, chief economist at Bank of Ayudhya, pointed out that household debts have ballooned as a result of incentives for the purchase of cars and other items introduced by the Thai government in 2011. This is a structural factor that will weigh on future consumption, Somprawin said.

Thailand's household debt ratio is close to 70%. That is higher than in Japan and other advanced economies, which have ratios of about 58%, and well above that of the eurozone. The main reason is auto loans. To support the car industry, the Thai government introduced tax incentives to encourage purchases, which took off in 2012. As a result of the higher debt load, personal consumption has been sluggish and inflation has been weak.

In Malaysia, too, household debts have soared as the government encouraged the purchase of homes, among other domestic-demand boosting measures.

Malaysia's currency is vulnerable, partly due to a shortage of foreign reserves. The country's policy interest rate, which also serves as the loan rate benchmark, is relatively high for Asia, at 3%, reflecting the vulnerability of the ringgit. The interest burden also weighs heavily on households.

The pattern of heavy household debt suppressing consumption is also visible in China.

Chen Tie-zhu, a 38-year-old migrant worker who lives in Shanghai, is a typical example of an indebted homeowner. "Now that I have bought a house I feel I am a full-fledged member of society, but I am having a hard time trying to make ends meet," Chen said.

He bought a condominium for 4.6 million yuan ($668,000) in Shanghai in 2017, taking out a mortgage of 2.3 million yuan. Chen and his wife devote around two-thirds of their combined take-home pay of about 20,000 yuan a month to their house payment.

The couple has to pinch pennies -- they even skipped holding a wedding reception -- to keep up with their loan payments.

In 2018, China's household debt ratio -- household debt as a share of income -- stood at 53%, up 34 percentage points from before the 2008 global financial crisis. That is the fastest growth among major economies.

Household debt as a percentage of disposable income, a better-known measure of debt, stands at 120% in China, even higher than the roughly 100% in the U.S., which is known for its free-spending consumers.

In the case of China, high housing prices, which are partly fueled by the government's efforts to keep the economy humming, are the main driver of high household indebtedness.

In the southeastern city of Shenzhen, for instance, house prices averaged 34 times average annual household income in 2018, according to Shanghai-based E-house China R&D Institute. That compares with 6.3 times in Japan (in 2017 according to the land ministry) and 5.7 in the U.S. (in 2016, on a median basis).

The upshot is that many Chinese families struggle with crippling debt burdens. These heavily indebted households inevitably cut back on other expenditures to meet their debt obligations.

Yuji Miura, a senior economist at the Japan Research Institute, said there are signs in China that rising household debt is crimping retail sales. These signs include 12 straight months of falling car sales. China hopes to transform its economy into one driven by consumption, but it already faces hurdles in the form of heavy household debt.

In Japan, household debt nearly tripled in the 1980s, when housing prices soared, and the ratio of household debt to disposable income rose from more than 70% to 120%. The collapse of the bubble economy led to a severe recession and years of sluggish consumption.

In stark contrast to emerging countries, where the debt ratio continues to rise, households in the U.S. and other developed countries have seen their debt ratios decline after peaking during the global financial crisis.

Emerging economies, including China, are expected to follow the U.S.'s lead, cutting interest rates and adopting a more accommodative monetary policy. But the effects of the easing will wear off. The hangover that comes afterward could linger.

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