2010 August 03 Tuesday
Low Consumer Debt In China
One of the things China has going for it: little consumer debt.
COLUMBIA, Mo. — The Chinese government has made several reforms to its economic policies in recent years. Despite these reforms, a new study shows that Chinese households are not utilizing their credit market to its fullest extent. Rui Yao, a researcher in the department of Personal Financial Planning in the College of Human Environmental Sciences at the University of Missouri, says a recent survey of urban Chinese households shows that the Chinese credit market remains underdeveloped.
“On average, Chinese urban households own very little debt, which indicates that they are not utilizing debt to level their life-cycle consumption,” Yao said. “While it is good that Chinese households aren’t overspending, refraining from taking advantage of the credit market is slowing the Chinese economy.”
It is my impression that local governments in China are far more deeply in debt and the banks have lent too much to dodgy businesses. Have the local governments sold their debt to state banks or consumer savers? If a bubble bursts in China it will be with business loans or governments hitting funding problems. The Chinese government will have to bail out its banks or risk a massive run on the banks.
While we hear a lot about a big real estate price bubble in China the prices there have not been driven up by excess mortgage issuance.
Yao studied the data collected by researchers at Tsinghua University in Beijing, during a 2008 survey of urban Chinese households. The survey showed that only 11 percent of Chinese urban households held any kind of debt, compared to nearly 80 percent of U.S. households. The survey also revealed that while more than 85 percent of Chinese households owned residential properties, less than 10 percent hold a mortgage on their property. This is compared to the U.S., where more than 70 percent of households have a current mortgage on their homes
The study reports a 50% savings rate among Chinese consumers. Are they saving up to buy houses? Or saving for retirement?
Speaking as someone who has a high savings rate, I'm either saving for retirement or rejuvenation therapies. Imagine hundreds of millions of aging Chinese trying to withdraw their money from government banks in order to buy rejuvenation therapies. I expect China to become the biggest market for rejuvenation therapies.
Update: Note in the comments the comments by Zoolbia about intra-family lending in China to fund property speculation. If this is true then I'm still puzzled. Family size in China is small. How many relatives are behind each housing purchase? How distant are the relatives from the buyers?
By Randall Parker at 2010 August 03 08:10 PM
"...refraining from taking advantage of the credit market is slowing the Chinese economy."
That one liner really hit my funny bone.
I'm not sure that article captures one aspect of Chinese financing: intra-family lending. A lot of those Chinese real-estate investors do have quasi-mortgages. Rather than taking out secured (by the property) loans from banks or commercial lenders (i.e., mortgages), Chinese people borrow from their families. At the same time, much family savings are invested in family-members' property speculations. That means the Chinese, too, will suffer if property prices fall from their current bubbly levels, since family savings will end up in illiquid "underwater" loans-- which family members may eventually pay back, but which will no longer be secure against default due to unemployment or whatever.
China uses Chartalist money principles, sometimes called Sovereign Money. Thomas Edison once said that you can print a bill as easy as a bond. Henry Ford said that if American's understood their money system there would be revolution overnight. Sovereign money is printing bills or issuing money straight into the economy without having debt back it up. Lincoln used Sovereign money with Greenbacks to fund the Civil War. The economy grew during the War, and Greenbacks almost kept parity with Gold. Today, all of our new money is backed up by new debt.
China uses Sovereign Money to make us debt slaves. For example, when you buy a Chinese good, your dollars go to the Chinese company who made it. The Chinese government trades Yuans for the Chinese Company's dollars. The Chinese Govt then takes those dollars and buys our TBills. Effectively, the Chinese took out Dollars out of circulation and propped up the value of the dollar relative to the Yuan. Supply of dollars decreased hence their value increased. Why no inflation in China? Because their economy is growing at the same rate as their money supply. The Chinese printed Yuans out of thin air, and made us into debt slaves.
China has high reserves in their banks, their people are not in debt. China is strategically buying up wealth producing assets around the world. To decrease a bubble you take money out of it through taxation, or increasing interest rates, or asking for the loan to be paid off early. Also, the Chinese gov't is encouraging their people to hold gold as intrinsic wealth. Do they know something about the coming future?
“On average, Chinese urban households own very little debt, which indicates that they are not utilizing debt to level their life-cycle consumption”
Hmm, their behavior does not conform to our economic models... Clearly there is something wrong with their behavior.
I have been reading much the same as Zoolbia. They borrow against the property they have and give the money to loan sharks who then lend out billions to the developers, promising some huge return on investment. As I remember, some 25% or more. The description (sorry, I cant find it) sounded like classic Chinese gambling. The point of the article was the informal nature of the lending and how it was based on exploding real estate values, and would collapse if building stalled, or housing prices stagnated, even briefly. From the description, I wouldn't be surprised if the Columbia, MOresearchers had no idea it was going on.