Via Financial Times

China’s central bank has warned over the dangers of a rapid build-up in the country’s household debt, urging greater oversight of mortgages and consumer loans to decrease risks to the country’s financial system.

Household leverage hit 60 per cent of China’s gross domestic product as of the end of 2018, with total debt now equal to total household income, the People’s Bank of China said in its annual financial stability report.

“The debt risks of the household sector and some low-income households in some regions are relatively prominent and should be paid attention to,” the PBOC said, calling for tougher policies to “guard against household sector debt”. 

The report will add to concerns about the impact of China’s rising debt pile on its economic growth, which in the third quarter fell to its weakest rate in about three decades. 

While companies and local governments have been the main drivers of the country’s debt accumulation, consumer lending has grown more rapidly in recent years.

Beijing has stimulated property investment by relaxing mortgage lending while rising debt has boosted consumer spending, helping to make the latter the main driver of China’s economic growth over the past five years.

China’s household leverage is still low compared with the US, where it is about 75 per cent of GDP. But it is higher than in the EU, where household debt stands at about 50 per cent of GDP.

China’s ratio has also more than doubled since 2012, leading the central bank to warn that it was “relatively high” compared with other developing countries. 

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Chinese household incomes have continued to rise, making debt more manageable, but some economists have said rising repayments could drag on consumption in the long-term. 

“A further build-up in household debt could translate into worsening performance amid a slowdown in economic growth,” ratings agency Fitch said in a recent report. 

Most Chinese household debt consists of mortgage loans, many taken out as part of speculative bets on the property market. 

Nearly 66 per cent of outstanding mortgage debt last year was owed by families who already own more than one property, the Chinese Household Finance Survey said last month. 

The PBOC called for curbing loans made for “speculation” on housing, greater checks on households’ creditworthiness, and more education for low-income households on the risks of personal loans. 

The bank’s estimate of household debt was higher than those made by other international bodies. The Bank for International Settlements estimated household leverage at 54 per cent of China’s GDP last year. 

“The rapid rise in China’s household debt remains of wide concern, as it could weigh on consumer spending. Servicing household debt continues to suck up more of Chinese household income,” said Ernan Cui, an analyst at consultancy Gavekal Dragonomics. 

Additional reporting by Wang Xueqiao