Loans of Chinese households threaten to generate a massive financial crisis

Economy Nilgun Salim
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The strong growth in the real-estate industry generated critical debts in the Chinese households. According to specialists, the decline in the real estate sector might throw the second largest global power in a crisis and such an unfortunate scenario will also affect the world’s economy.

‘Relaxed’ lending terms and other changes transformed the Chinese people from consumers with a large aversion towards debts in loans lovers. In recent years, family wealth has risen significantly amid the increase in the property prices from most Chinese cities. Meanwhile, the rise of the prices fueled this ‘boom’ in the mortgage sector.

China’s household debt rose from 28% to 40% of GDP in the last five years. The percentage of the loans reported by households reached 67.5% in the third quarter of the year. The value represents the double of the value recorded one year ago.

This growth generates massive fears regarding a potential collapse in the property prices, creating a domino effect in the interest rates, exchange rates and commodity prices.

Although the debt levels of households are still low in China compared with other advanced economies such as the U.S. (almost 80% of GDP) and Japan (60%). If the situation will maintain its current pace of growth, the values could reach 70% of GDP in a few years.

Worldwide, the most indebted households are in Australia, with 125% of GDP. The Communist Party has set a growth target of 6.5% -7% for 2017 and China could reach a partly thanks to frenetic activity in the real estate and lending conditions relaxed. But the current pace of lending threatens to generate considerable risks.