World Economy

China central bank chief raises new worry in China: Mortgage-driven household debt

Key Points
  • Although analysts are generally optimistic that Chinese officials will gradually reform corporate reliance on debt, China's mortgage-fueled household debt is growing at an "alarming" rate, Citi says.
  • Chinese President Xi Jinping called out the property sector in his key speech this week.
  • China's central bank governor also commented on rapid growth of household debt and raised worries about a coming sharp drop in asset prices.
Zhou Xiaochuan, governor of the People's Bank of China (PBOC), attends a news conference at the Great Hall of the People during the 19th National Congress of the Communist Party of China in Beijing, China, on Thursday, Oct. 19, 2017.
Qilai Shen | Bloomberg | Getty Images

China's central bank chief just warned about a potential bubble in China: Rising household debt.

"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," People's Bank of China governor Zhou Xiaochuan said Thursday. He didn't expect any action should be taken immediately but said the debt levels should be monitored for quality and a steady pace of growth.

His comments from the sidelines of the 19th National Communist Party Congress notably contrasted with the overall positive tone on China's economy from party officials.

The bigger worry about China has been high levels of corporate and local government debt. The Chinese government has spoken about the need to limit that growth, and most analysts expect authorities will gradually rein it in. But this year, household debt has arisen as another area of concern about financial leverage in China.

"China's household debt has been rising at an 'alarming' pace over the past two years," Citi analyst Li-Gang Liu said in an Oct. 10 note. The report pointed out that outstanding household debt in China has doubled from 29.6 percent of gross domestic product at 16 trillion yuan ($2.41 trillion) in 2012 to 44.3 percent of GDP at 33 trillion yuan last year.

Mortgage loans for buying property are the largest driver of that household debt growth, Liu said. Property prices, especially in major Chinese cities, have shot higher as "the returns on property investment were much higher than interest rates on savings and loans."

During a key address at the twice-a-decade party congress on Wednesday in Beijing, Chinese President Xi Jinping reiterated that "houses are for living in, not for speculation," according to global media reports.

"While the comment isn't new, to reiterate it at such an important meeting is highly unusual," Larry Hu, head of greater China economics at Macquarie, said in a Thursday note. Hu does not expect the Chinese government to relax its restrictions on property purchases in the next 12 months.

In order to prevent speculation from sending property prices even higher, local Chinese governments have implemented policies to restrict purchases such as limiting the number of apartment units someone can own and how soon they can resell them.

Soon-to-retire central bank governor Zhou also made headlines Thursday when he said in the same question-and-answer session that excessive optimism could lead to a "so-called Minsky Moment," or a drop in asset prices.

The Minsky Moment, named after economist Hyman Minsky, describes the time when a market suddenly collapses after an extended period of speculation or unsustainable gains. On Thursday after Zhou's remarks, Hong Kong's Hang Seng index fell nearly 2 percent, Dow futures tumbled more than 100 points ahead of the open, and Treasury yields fell.

"This is what Zhou says now, but where was this recognition along the way?" said Leland Miller, head of a private survey of Chinese businesses called the China Beige Book. "On his watch, China created the largest credit bubble in human history. It's a little late to distance from it now."

The IMF pointed out in its Global Financial Stability Report earlier this month that Chinese banking sector assets are now 310 percent of GDP, up from 240 percent at the end of 2012 and nearly three times the emerging market average.

"Debt in China is our No. 1 risk in the whole world," said Paul Christopher, head global market strategist at Wells Fargo Investment Institute. But rather than worrying about financial disruption from China, "I would worry more about the prospect of slowing China demand."

Worldwide, stocks have rallied partly on stronger economic growth in a "global synchronized recovery." Stabilization in the world's second-largest economy, China, has played a major role in that more optimistic outlook. The International Monetary Fund increased its outlook for Chinese gross domestic product by 0.1 percent to 6.8 percent this year — exactly in line with what China reported for the third quarter last week.

But property purchase curbs and Chinese household debt could spill over into the Chinese consumer growth story.

In a report last Monday about how increasingly wealthy Chinese will boost demand for high-end products, Sanford C. Bernstein analysts said the property market has been the "single largest driver" of the increase in Chinese wealth. They estimate the property market has increased in value by about $12 trillion since 2010, while overall private wealth among Chinese households has increased from $10 trillion in 2010 to $34 trillion.

"As one example, since 2010 the owner of an average 90-square-meter apartment in Shenzhen has experienced a capital gain of almost US$500,000 (nearly a quadrupling in value)," senior equity research analyst Euan McLeish and a team of analysts wrote. "That kind of appreciation in personal assets changes behavior."