Are China’s spenders borrowing their way into economic trouble? Far from it, actually

This retail bonanza is, for some, an opportunity to marvel at how quickly China is transitioning into a consumption-driven economy. For others, there are concerns that consumers are excessively reliant on debt to fuel their purchases. People point to the implosion of peer-to-peer lenders as a warning sign, even though they are a small part of a loan industry that is dominated by traditional banks and new fintech companies.

The main data point that worries people is China’s household debt, which at the end of 2018 had reached US$7 trillion, much higher than at the beginning of the decade. Should we be concerned by this sharp rise though? I think not.

For a start, household debt includes mortgages, which are not a good reflection of consumer credit. Over the past decade, house prices in China have exhibited strong growth and countless millions have borrowed to get onto the property ladder, so it is no wonder that household borrowing has grown much quicker than GDP.

The second point relating to household credit is that international comparisons show it is at a sustainable level in relation to the size of the economy. At the end of 2018, Chinese household debt was just 52.6 per cent of gross domestic product, compared with 75.9 per cent in the US, and 91.9 per cent in South Korea.