Illustration: Peter C. Espina/GT While there is much concern among the public about China's local government debt and corporate debt, which are considered key sources of risk, the rising household debt and the consequent liquidity constraint should not be underestimated. Based on our research, the household debt problem has already become a huge hidden danger to the economic health of China. For a long time the importance of household debt has been ignored given the relatively small proportion of household debt to China's total debt. According to data from the National Bureau of Statistics, China's medium- and long-term household loans, mostly mortgages, reached 21.8 trillion yuan ($3.2 trillion) by the end of April, accounting for nearly 20 percent of the total loans. But if you look at the household debt-to-GDP ratio, things are different. As of the end of last year, the household debt-to-GDP ratio hit 44.4 percent, and the figure is expected to be around 60 percent if provident fund loan data is taken into account. From the perspective of historical experience, such a leverage ratio is not very high, close to the Japanese level of 62.5 percent at the end of 2016, but still lags behind America's 79.5 percent and the UK's 87.6 percent. However, the situation might look more serious if we apply two other indicators. The ratio of newly added mortgages to households' disposable income in China was 16.9 percent in 2016, far exceeding the pre-crisis peak in the US, which hit 11.2 percent in 2005. Moreover, the figure was only 6 percent or so in China in 2014, meaning that it surged significantly over just two years thanks in large part to the soaring property market. Meanwhile, the ratio of mortgage balance - including provident fund loans - to households' disposable income was 68.3 percent at the end of 2016. Even if the provident fund loans were deducted, the ratio still hit 56.4 percent. If household debt continues to accumulate at the current speed in the future, we estimate that the mortgage balance-to-disposable income ratio in China might reach the American pre-crisis peak as early as 2020. The above data analysis indicates that China's household debt is a serious risk to financial security. As a result of the decline in income growth as well as mortgages, Chinese households have generally been short on liquidity. In other words, the soaring mortgages have inhibited China's economic growth to a certain extent. According to the latest research paper by scholars Atif Mian, Amir Sufi and Emil Verner, an increase in household debt will potentially undermine GDP growth through affecting household consumption. From the historical experience of the world, if the mortgage-to-GDP ratio increased by 6.2 percentage points over the past three years, then GDP growth might go down by 2.1 percentage points in the next three years. Signals for many serious potential crises first have started from a sharp rise in household debt, followed by liquidity tightening and a substantial decrease in consumption. And a consumption slump usually leads to a drop in output growth. So far, China's consumption remains quite steady, with no sign of any sharp fall. A financial crisis, especially a debt crisis or mortgage crisis, first occurs in medium- and low-income families. According to the experience of the US and Europe, a household debt crisis that happens to the medium- and low-income classes is enough to trigger a systemic financial crisis as evidenced by the subprime mortgage crisis. We have reached a similar conclusion based on our research on Chinese family data models. If the proportion of Chinese households subject to liquidity constraints increases by 1 percentage point, the GDP growth would slow down by 0.12 percentage points during the same time period. From 2012 to 2014, the proportion of households subject to liquidity constraints climbed by 19.3 percentage points, which could be translated into a drag of 2.35 percentage points on GDP growth. It is estimated that reform may have stimulated potential economic growth by up to 3 percentage points, yet due to the impact of household debt, GDP growth has slowed down, which is why household debt deserves our immediate attention.
Rising household debt in China is an overlooked factor which is a major hidden danger to China 's economy , warns financial Times . China 's medium and long - term household loans reached CNY21.8tn ( $ billion ) by the end of April this year , accounting for 60 % of loans in the country , and as of the end of 2012 , household debt - to - GDP ratio reached 44.4 % , however if you take into account provident fund loan data it is expected to be around 60 % . If household debt continues to rise at its current levels the mortgage balance - to - disposable income ratio in China could reach US pre - crisis peak as early as 2020 .