The risks posed to China’s financial system stability by rapid growth in household leverage should ease in the medium term as the authorities continue to tighten regulation of household lending, advancing their efforts to improve underwriting standards (particularly for online lending) and risk controls, says Fitch Ratings.
We believe that tighter regulation, as part of broader efforts to reduce financial-system risks, will result in slower growth of household lending in the period to 2025. This should help to stabilise China’s system leverage, although lending to households is still likely to rise as a share of GDP.
China’s household debt continued to rise rapidly last year, despite the Covid-19 pandemic. As a share of GDP, it rose to 62% by end-2020, up 9pp from end-2018 levels. Periods of rapid household debt growth can be followed by sharp market corrections, as South Korea, Taiwan, Thailand and the US have experienced in previous cycles.
The increase in household leverage has been driven primarily by mortgage lending, but unsecured consumer lending, such as credit cards, has also grown rapidly in recent years. We estimate credit card balances grew to around 8.6% of GDP by end-2020, higher than in the US or Korea.
The increasing focus of individual banks on unsecured household lending may ultimately lead to divergence in their intrinsic credit profiles, which will influence our assessment of their company profile and risk appetite, and hence their Viability Ratings.
