In the past ten years, Chinese consumers have been one of the most important driving forces of the world economy, inspiring people's long-term hope of gaining growth profits. Therefore, it is worth mentioning what is happening to the family balance sheet when Covid-19 causes severe damage to the economy. Now, these people feel the negative impact of rising personal leverage brought about by economic prosperity.
During the last major financial crisis, big-handed Americans were hit hard, but the Chinese found a new way to open their wallets and drove other parts of the global economy. According to data from the World Bank, from 2010 to 2017, the contribution rate of China's household consumption growth was 31%, making it currently account for about 10%. This includes about 30% of auto, luxury retail and mobile phone spending, as well as hundreds of billions of dollars in tourism spending.
Jim O’Neill, former chief economist at Goldman Sachs Group Inc., told the Financial Times last year that Chinese consumers are "the most important thing in the world economy." They may be the key to growth in the next 40 years, and no other country is likely to replace them.
Will they be able to eliminate the haze of the global economy this time? They will worry about their problems first.
In the quarter ending in March, disposable household income contracted sharply for at least the first time since 2013, which put pressure on the balance sheet, and new forms of credit and financial assets accounted for a larger proportion. In recent years, consumer credit from credit cards to peer-to-peer loans and other loans has exploded. A survey by the central bank showed that about 60% of household assets are stored in real estate. About 97% of debt is tied to bank loans, and mortgage loans account for almost 70% of the total.
With differences in borrowing and income, the pressure on individuals and families is increasing. Analysts at CLSA Ltd. said households owed a total of 63 trillion yuan ($ 8 trillion) in debt, accounting for 65% of GDP. The leverage ratio exceeded 130% of last year's revenue. After adjusting for GDP per capita, China ranks highest among major countries. Compared with the United States, Australia and Japan, the debt service ratio has grown much faster.
Due to the blockade, less money and changes in consumer psychology brought about by coronaviruses, spending patterns are changing. Of course, online shopping has increased. The total commodity value of necessities and commodities such as household hygiene items has skyrocketed. A survey conducted by UBS Evidence Lab in April showed that when people returned to work, 54% of respondents said their income had dropped, while 60% had reduced offline consumption. Less than half expect a salary increase soon, while a quarter plan to reduce their debt. Real estate purchases were put on hold.
Austerity may be a good thing. Early signs already indicate trouble. Credit card debt is rising. Consumer loan asset-backed securities are even weaker, with overdue payments rising sharply from 6% in January to over 9% in March. This shows that the quality of household balance sheets between major borrowers and weaker borrowers is declining. Bad consumer credit is expected to double this year.
Middle-class borrowers have always been the bulk of China ’s spending, but most of the incremental growth will come from aspiring buyers trying to enter a higher socioeconomic class. Now, they can't do it. If they are injured, who will pay? Goldman Sachs analysts pointed out that in China, the marginal consumption propensity of low-income urban families is not only greater than that of high-income earners. Migrant workers also spend less than urban residents. Even if their income levels are similar, the difference is very large.
Since China's economic modernization in recent decades, it can be said that the new generation of consumers has never had a lesson in crisis management. The impact on them may in some ways be greater than the impact on American families around 2008. So far, the arrears in the United States have been stable. According to data from the Federal Reserve Bank of New York, national non-housing debt remained flat in the first quarter, while credit card consumption declined. There is no doubt that as income insecurity and unemployment rise, American consumer spending will be affected, but a social safety net has been established. China is still underdeveloped in this respect, and unemployment is brewing.
How China responds to these pressures will be crucial. Of course, it is gratifying that a large part of wealth is hidden in real estate assets. However, changes in property value or price will not really affect the consumption of durable goods. What happens when the cash flow shrinks? The retail spending needed for economic recovery will not be realized in vain, income will continue to decline, and a cycle will continue. China's stimulus to individuals needs to be stronger.
No matter what the new normal is, China's personal consumption may no longer be as reliable as it is now. Those who seek consumption growth may want to turn elsewhere.