China should learn household balance sheet lessons from US subprime crisis: report
Chinese policymakers could use American response to recessions as a reference, new report argues
The report, first published in the magazine Financial Minds, was reposted by CASS on Monday.
“The evolution of household balance sheets throughout the three American crises can offer experience for China as we explore macro-level balance sheet management,” the report’s co-authors, CASS researcher Li Cheng and Zhang Xiaobo from Southwestern University of Finance and Economics, wrote.
Comparing the harm from China’s protracted property slump to the way the subprime mortgage crisis crimped American consumption through a “home prices–mortgage loans–credit–consumption” mechanism, the report warned that if China’s depressed home prices were compounded by macroeconomic challenges, households could decide to save even more, at the cost of consumption.
“This is out of a desire to guard against deterioration of balance sheets,” they wrote. “This would, in turn, hurt demand and affect local government fiscal revenue.”
The report said that since Chinese household leverage increase in the past decade was fuelled by housing loans, changes in home prices and mortgage cost would have an “outsize” impact on spending and financial stability, even though Chinese households’ overall debt exposure was smaller than their US peers.