While concern over China’s decade-long debt binge has focused primarily on leverage in the corporate sector, analysts point out that household borrowing is now starting to catch up.
Writing for The Financial Times, Matthew C. Klein points out that Chinese household debt has grown at a rate of around 23% per year on average since the start of 2007, as compared to an average yearly gain in disposable household income of roughly 12%.
While Chinese incomes have posted an impressive rise over the past decade, at least tripling since 2007, Klein notes that this increase is dwarfed by growth in debts by nearly a factor of nine.
As of mid-2017 the debts of Chinese households were equal to around 106% of their disposable incomes, as compared to a figure of 105% for US households.
While Chinese household debt comprises a relatively small share of total non-financial debt at around 18% in mid-2017, it nonetheless account for around a third of leverage growth.
Klein points out that this surging growth in household debt could bode very poorly for the China’s economy, given that households still claim only a modest share of the country’s GDP.
According to Klein the share of Chinese GDP going to households has hovered between 42% – 46% since 2007, as compared to 71% and 76% in the US.
Given this inequity, renowned expert on the Chinese financial system Michael Pettis says that the solution to the country’s debt dilemma will be to raise the the share of wealth reaped by households.
“Rising consumption must be driven by rising household income, even as declining investment causes workers on investment projects to be fired…economically it is just an arithmetic problem about wealth reallocation.”