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Home truths are holding back China's consumers

Retail sales, at 8.2%, rose slowest in 15 years - an ominous sign

Customers at an Apple store in Beijing. Communication appliances posted a 0.9% drop, pointing to weakening consumer spending that spells trouble for the government's hopes to boost domestic demand.

CHINA'S consumers have been tightening their belts, and the trend looks unlikely to reverse any time soon.

Retail sales rose 8.2 per cent in December from a year earlier, holding close to their slowest pace in 15 years, data released on Monday showed. Big-ticket items such as automobiles slumped 8.5 per cent and communication appliances posted a 0.9 per cent drop - testament to the falloff in demand that led iPhone maker Apple Inc to blame China for cutting its revenue outlook earlier this month. 

Weakening consumer spending is an ominous sign for a government that's looking for domestic demand to pick up the slack as it tries to wean the world's second-largest economy off its dependence on export- and investment-led growth. And there's an ironic familiarity in the reason for the consumer's growing fragility: debt.

China's household debt as a percentage of GDP surged to 53.2 per cent in December, from 36 per cent five years earlier, according to CEIC data. While that remains below the global average of 62 per cent, it's the pace of growth that has caused concern. China's household debt levels are now at the high end for emerging markets, the International Monetary Fund (IMF) noted in October.

"China's household leverage often flies under the radar, but it should not," Moody's Investors Service said in a December report.

For the past six years, China's disposable income has increased at an average rate of 10 per cent annually, versus a 20 per cent increase in household debt, the ratings company said. The growth of average household debt accelerated to 26 per cent in the past year. The government has sought to rebalance the economy towards consumer spending after its infrastructure-heavy growth model led to a surge in debt. China's total debt as a percentage of GDP reached 266 per cent in 2017, according to Bloomberg Intelligence's estimates, from 163 per cent in 2006. 

Banks have responded by lending more to consumers. Loans to companies fell to 60 per cent of the total for Chinese banks in the first half of last year, from 71 per cent in 2009, according to CGS-CIMB Securities Hong Kong Ltd analyst Michael Chang. Consumer loans accounted for 36 per cent in the first six months of 2018 versus 20 per cent in 2009. The majority of those were mortgages, which accounted for 27 per cent of total loans.

The explosion of mortgage credit has been great business for banks. Home loans are much less likely to be money-losers than corporate advances, as we've noted previously.  Downpayments are at least 30 per cent for first mortgages and as high as 80 per cent for second ones, meaning defaults are unlikely. To top it off, there's no personal bankruptcy law in China. That means lenders can not only repossess the home but pursue all the borrower's assets in the event of default.

However, there are mounting signs that the weight of debt is starting to crimp household budgets. Short-term consumer loans, largely credit-card borrowings, have been slowing.  A stretched consumer doesn't make for a spendthrift.

Chinese wage earners have plenty of other anxieties that could encourage them to hold on to their cash, including increasing job insecurity as the economy slows and the trade war prompts companies to shift factories to countries such as Vietnam.

The government's crackdown on shadow banking and the shakeout among P2P lenders have also reduced the availability of consumer finance.

So far, Beijing has resorted to a drip-drip of  increased tax cuts, easier liquidity for banks, and even subsidies for purchases of fridges and cars. It may take a lot more than that to get China's wallets back out in a big way. BLOOMBERG