More economic trouble for China?: Household debt rate inches closer to the IMF warning line

China's household debt levels have reached record levels, a South China Morning Post report has said.

According to a report released by the National Institution for Finance and Development (NIFD), the country’s household debt increased from 61.9 per cent at the end of last year to 63.5 per cent in the second quarter of 2023. The debt rate is inching closer to the International Monetary Fund (IMF) warning point of 65 per cent, which indicates potential financial risks.

The rise in household debt comes amid an economic downturn and the Xi Jinping-led administration's push to increase consumption in order to stimulate the economy.

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As on June 30, consumer loans, credit card debt, private borrowings, and loans used to fund business operations occupied the majority of China's household debt at 38.6 trillion yuan (US$5.38 trillion).

Given that consumer income growth has trailed behind economic recovery and that people are increasingly likely to save money for future expenses such as mortgage payments, energy bills, child care, and their own uncertain futures, analysts are now more concerned about consumers’ actual ability to spend.

The NIFD report noted that citizens are more inclined to use their savings to pay off debt in order to lower asset risks rather than to consume and invest due to the debt pressure due to their "pessimistic expectations of future economic growth".

Moreover, the Economist Intelligence Unit (EIU) has cautioned that the lack of decisive measures, such as household-focused fiscal transfers, could restrict the effectiveness of Beijing’s increase in big-budget expenditure.

China’s falling exports worries experts

While the primary cause of China’s dramatic decline in exports is thought to be the widespread impact of a global economic slowdown, economists and trade experts quoted by the South China Morning Post caution that the impact of developed countries’ “de-risking” activities should not be understated because “the worst is yet to come”.

After falling by 7.5 per cent in May, Chinese exports experienced their sharpest downturn since the early months of 2020 in June, falling by 12.4 per cent compared to a year earlier.

Except for Russia, where Chinese exports surged by 91 per cent year-on-year, the majority of China’s trading partners, including established and emerging economies, experienced a dip in June. Notably, only 3.4 per cent of China’s total exports were accounted for by Russia.

As per reports, one-fourth of all exports from China are shipped to the US and EU. But since late last year, consumer demand for Chinese goods has declined due to Western economies slowing down and rising prices.

There is also a strong and growing sentiment among fashion companies in the US to “reduce China exposure” due to worries about the risks of forced labour in the supply chain and escalating US-China tensions. South China Morning Post quoted Sheng Lu, an associate professor with the Department of Fashion and Apparel Studies at the University of Delaware, as saying that the impact of the “de-risk” movement on China’s exports should not be underestimated.

However, Phillip Maro from the Economist Intelligence Unit added that many businesses are realising how challenging it is to transition away from the fiercely competitive and sophisticated Chinese Chinese manufacturing ecosystem.

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