Chinese state power may have found its limit in the effort to keep household debt in check.
Beijing is wisely wary of the decade-long boom in China’s housing market, the consequent build-up in borrowing and what it means for the country’s development model. But in the data there is no sign of a crackdown.
Last week, in its annual Article IV assessment of the Chinese economy, the International Monetary Fund raised its forecasts for Chinese household debt by several percentage points. The IMF expects household debt to rise to 56.2% of GDP this year, and as high as 67.9% of GDP in 2024. The latter figure would be well above current levels in Japan and the eurozone.
Based on activity in the housing market, where the majority of household debt is generated, the IMF is right to cast doubt on Beijing’s plans to deleverage.
In the past 12 months, developers have booked a record 11.7 trillion yuan ($1.66 trillion) in pre-sales—sales of homes due to be completed in the years ahead. Assuming that buyers put down a deposit of around 30%, that is north of 8 trillion yuan in mortgage debt not yet fully on the shoulders of the household sector. Until the property is built, mortgage debt acquired for forward delivery of housing is taken on by buyers but guaranteed by developers.
In comparison, Chinese household debt rose by 7.3 trillion yuan between the end of 2017 and the end of 2018, according to data from the Bank for International Settlements. Assuming there will be a little bit of mortgage repayment too, a similar increase seems likely in 2019 from pre-sale mortgage debt alone. That excludes any mortgage debt raised to buy completed homes as well as any other forms of consumer credit.
The government has good reasons to want to stop the buildup. Many emerging markets have struggled to regain high levels of growth after generating considerable property-related debt, particularly in Asia.
But there is no sign that household debt is even plateauing, let alone declining. Beijing’s stated preference is for an end to speculative household borrowing, but it is proving to be a difficult habit to kick.
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