Central Bank Concerned by Growth in Mortgage-fuelled Household Debt

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The head of China’s central bank has expressed concern over the rapid growth in household debt levels on the back of mortgage loans for property purchases.

“Regarding household debt levels, China doesn’t rank that high on a global scale, but the pace of growth has picked up in the last few years,” said Zhou Xiaochuan at the sidelines of the 19th National Communist Party Congress.

Zhou remarks about rapid growth in household debt levels mark a departure from the central government’s repeated emphasis of late on the need to tackle leverage in the corporate sector, and especially amongst state-owned enterprises.

Observers concur with his Zhou’s concerns however, with Citi analyst Liu Ligang pointing to an “alarming” rate of increase in China’s household debt levels over the past two years in an October 10 note.

According to the report China’s outstanding household debt has doubled 16 trillion yuan (USD$2.41 trillion) in 2012, or 29.6% of GDP, to 33 trillion yuan last year, or 44.3% of GDP.

Liu points to mortgage loans for property acquisitions as the biggest contributor to the surge in household debt, despite aggressive efforts by local government to clamp down on the flow of funds to the real estate market.

Real estate prices have skyrocketed in recent year because “the returns on property investment were much higher than interest rates on savings and loans.”

While the 19th National CCP Congress has largely been an upbeat, cheat-thumping event, observers note that President Xi Jinping made the unusual move of referencing the central government’s dictum that “houses are for occupation, not speculation” during his three hour-long keynote address.

“While the comment isn’t new, to reiterate it at such an important meeting is highly unusual,” said Larry Hu, head of greater China economics, Macquarie, in a Thursday note that forecasts continued restrictions on property purchases for at least the next 12 months.

Property nonetheless remains a primary source of wealth creation for China’s emerging middle-class, which means that clampdowns on real estate acquisitions and household debt could adversely impact efforts to transition to a more consumption-driven economy.

According to analysts from Sanford C. Bernstein the property market has been the “single largest driver” of Chinese wealth growth.

According to their estimates the property market has increased by around $12 trillion yuan in value since the start of the decade, during which period the wealth of Chinese households has risen to $34 trillion from $10 trillion.

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