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Chinese consumer debt load worsens delays



To understand some of the reasons why the Chinese downturn seems different this time, you need to understand how Chinese consumers have changed. In short – like the rest of their country – they are much longer than they were. According to analysts of Autonomous Research, household debt has grown almost twice as high as its 2008 earnings.

This is against the prevailing story of Chinese consumers for the past few years. It has been said that they have saved too much and that – in order to stimulate economic growth – politicians should try to make them spend more with tax incentives and such.

But that's not what the data is already telling us. In 201

4, when China was last delayed, household debt was around 40% of GDP. Now – just over four years later – it has risen to 60%, which is in line with the European Union and the United States.

Even assuming that the average interest rate on all household debt is 6.5% from 2014-18-18, the service burden on Chinese households will double from 4 trillion yuan to 8 trillion yuan at the end of 2018, according to our estimates, "writes Charlyn Chu analyst at Autonomous Research.

" This 2-fold increase in debt servicing costs is well above the 1.4-fold increase in household incomes over this period, this additional CNY4trn is equivalent to 11% of the annual retail sales in 2018. This is the main reason China's consumption is not as strong as we have in the past, we think. Without the consumer, China can not move on to the next chapter of its economic story – it can not move on to an economy based on domestic demand from a country dependent on foreign investment.

So, along with all the problems that need to be addressed in China's strong corporate and financial sectors, politicians also need to understand how to ensure that consumers still spend while paying their debt.

Moreover, all this happens at a time when even official employment data in China – which has always been so consistent – has begun to diminish.

"According to official data, the number of jobs created has also declined year on year in 2H," says Societe Generale analyst Wei Yao.

The previous time happened in March 2015, when the economy suffered a painful slowdown, and recent household survey data show that wage growth has slowed down sharply from 8.6% in 3Q to 6.8% in 4Q, slowest than 3Q 2016. "

Read more: The most carefully watched analyst in China explains the" 5-second indicator "that tells you when the country's financial crisis was over

Consumers or mass

Bloomberg radio, Anne Stephenson-Yang, co-founder and research director of J Capital Resea rch Ltd., said that the term Chinese consumer is something like a misnomer. Indeed, she said, these users are "masses" that the government can direct to buy (or not to buy) items at will.

And so it was during economic downturns. In past delays, the government offers consumers tax breaks for things like household appliances (in 2009) and cars (in 2009 and 2015) – big tickets that make a difference in the economy.

The problem is that China has just emerged from an automotive incentive, so demand is weak and sales have been declining since 2017. More tax relief could help, but only to a limited extent, because the country's total tax revenue is about 16 trillion yuan.

This leaves the politicians the opportunity to take home appliances sales and – something they seem to have avoided – the real estate market. Until now, they have been avoiding increasing sales in the market that has already cracked, but could change their minds if things get worse.

In both cases, economists consider this kind of targeted policy to be limited.

"… we believe that such an improvement in sector-specific policy support is likely to be modest," Yao writes in his note. "The challenge is that with the slowdown in population growth and the concentration of spending over the last few years, the market is getting more saturated."

She added, "Forcing households to raise consumption at the expense of growing consumer debt and government subsidies will hamper the government's goal of achieving sustainable growth, so we are skeptical of any strong revival in spending." Politicians also have the opportunity to lower interest rates to make it easier for borrowers to repay their loans, but this risks stimulating capital outflows.


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