China’s increasing household debt sparks worries about financial risks in the country
Jan 09, 2019 (China Knowledge) - China’s household debt has continued to increase despite a wider deleveraging campaign led by the Chinese government. Now, some experts have even drawn similarities between the current situation and the build-up leading to the 2008 subprime crisis.
Country’s household leverage ratio has been increasing at an average annual rate of 3.5% since 2008, hitting 49% in 2017 from 17.9% in 2008. Growth rate of leverage ratio has even increased to nearly 5% since 2016.
As of the end of the third quarter last year, household leverage ratio in China stood at 52.2% increasing by 3.2 percentage points. Overall growth rate for 2018 is expected to be higher than that of the average growth rate over the last decade.
According to the International Monetary Fund (IMF), household leverage ratio of above 65% may start to pose financial risks to the country’s economy.
While financial institutions in the country have tightened mortgage and consumer loans, the number of such loans are still growing with consumer loans sometimes being used to fund real estate purchases.
Most of the risks come from a surge in short-term consumer credits obtained from institutions such as peer-to-peer lending sites, where loans can be taken with just a click of a button. Such loans do not usually involve any collateral and may result in increased risks should borrowers use these loans to pay for their mortgages.
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