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On February 16, “Seeking Truth” magazine published an article “Several Major Issues in Current Economic Work”. The article pointed out that the recovery and expansion of consumption should be given priority. The market has had a lot of discussions around consumption. This article discusses the prospects and measures to promote consumption from the perspective of the debt ratio of Chinese residents.
In the past three years, under the superimposed effects of multiple factors such as the epidemic and geopolitics, China’s economic growth has slowed down significantly. Against the backdrop of a colder and weaker macro-economy, the worsening employment situation of residents has led to a decrease in their labor income, and the decline in the prices of real estate and financial assets held by residents has led to a decrease in residents’ property income. The reduction in residents’ disposable income has a direct impact on residents’ income Consumption behavior has an inhibitory effect. What needs to be paid more attention to is that the current high debt ratio of Chinese residents will significantly magnify the durability and intensity of the above-mentioned factors that suppress consumer demand, making residents afraid to consume in the medium and long term. Looking ahead, consumption will recover vigorously in the short term, but uncertainties remain in the medium and long term. We believe that macroeconomic policies should be proactive, prevent the residents from forming pessimistic inertial expectations, and prevent the behavior of “depositing more and lending less” from becoming a mid- to long-term trend.
1. The high debt ratio of the household sector is an “amplifier” that curbs consumer demand
Internationally, there are two commonly used indicators to measure the level of household debt, one is the macro leverage ratio (resident debt balance/nominal GDP) used by the IMF and BIS, and the other is the debt ratio (resident debt balance/disposable income) used by the OECD , the former is rougher and the latter is more accurate. In order to measure the debt level of residents more accurately, this paper adopts the indicator of debt ratio, that is, the ratio of outstanding debt of residents to disposable income. From the perspective of the debt ratio, the debt ratio of my country’s household sector is at a historically high level, only slightly lower than the level when the subprime mortgage crisis occurred in the US household sector. The debt ratio of Chinese residents will rise from 115% in 2019 to 136% in 2022, an increase of about 18%. In 2019, the debt ratio of China’s resident sector was already at a relatively high level of 115%. Since then, under the impact of multiple factors such as the epidemic, the deterioration of residents’ employment situation has led to a decrease in their labor income, and the decline in the prices of real estate and financial assets held by residents has led to a decrease in residents’ property income, which has led to a decrease in residents’ disposable income. China’s debt ratio climbed rapidly to 140% in 2021, a record high. In 2022, some households will begin to repay their loans in advance to reduce their debt ratio and improve their financial stability. The debt ratio will drop to 136%, but it is still at a high level. What is particularly worthy of vigilance is that the current debt ratio of Chinese residents is only slightly lower than the historical high of 137% when the subprime mortgage crisis occurred in the United States. After the subprime mortgage crisis, the U.S. household sector reduced its debt level in an orderly manner. Today, the U.S. household debt ratio remains at 100%.
Figure 1 Residential Debt Ratio in China and the United States
Source: People’s Bank of China, Bureau of Statistics, Federal Reserve Bank of St. Louis, compiled by Shanghai Development Research Foundation
The high debt ratio of the Chinese household sector increases its financial vulnerability, amplifies and prolongs the suppression of consumer demand by a series of negative factors such as employment pressure and income decline, and becomes an “amplifier” that suppresses consumer demand. In the past three years, the impact of the epidemic has superimposed a series of “composition fallacy” and “decomposition fallacy” of policies. my country’s economic growth has slowed down significantly, and the income and employment situation of residents have deteriorated significantly. First, some residents’ labor income has been significantly reduced due to unemployment or business difficulties, which makes residents’ expectations for employment and labor income more negative. Second, as the pillar of Chinese residents’ assets, real estate assets account for about 36.8% of total assets. The decline in housing prices in some areas has caused a significant shrinkage of residents’ non-financial assets, which has caused a “crowding out effect” of real estate on consumer demand. Third, the decline in the price of equity financial assets led to a decrease in property income. Under the above-mentioned impact, the resident sector will naturally reduce consumption expenditures, and the high debt ratio of the resident sector in my country makes the financial situation of residents quite fragile. The debt service ratio will rise to a historical high of 15.6% in 2021, much higher than the 9.75% in the United States. s level. Under the circumstances of a weak economy, high debt and high debt repayment pressure, in 2022 there will be a trend of “more deposits and less loans” in the residential sector. Some residents will begin to repay loans in advance to actively reduce debt ratios, reduce consumption expenditures, and increase precautionary savings. According to the “Questionnaire Survey Report on Urban Depositors in the Fourth Quarter of 2022” released by the Survey and Statistics Department of the People’s Bank of China, 61.8% of residents tend to “save more”, a record high since statistics began in 2002. Of course, the short-term behavior of the household sector to “save more and borrow less” can increase its financial stability. However, the authorities must be aware that once such behavior becomes a medium-term trend, it will amplify and prolong the impact of a series of negative factors such as employment pressure and income decline. The inhibitory effect of consumer demand has become an “amplifier” that inhibits consumer demand and hinders the increase in consumer spending, which may bring about a continuous gap in aggregate demand and downward pressure on the economy.
2. Prospects for Residents’ Consumption
With the turn of the epidemic prevention policy, the offline consumption scene gradually recovered, and the long-term pent-up demand for watching movies and traveling was released in a concentrated manner in the short term, and the consumption autonomy recovered strongly in the short term. Judging from the situation during the Spring Festival, in 2023, the number of movie viewers in the Spring Festival stalls will return to more than 100 million, and the total box office will be 6.758 billion yuan, a year-on-year increase of 719 million yuan, showing a significant rebound. During the Spring Festival, the number of travelers reached 308 million, a year-on-year increase of 23.1%, and domestic tourism revenue was 375.843 billion yuan, a year-on-year increase of 30%. The popularity of travel has rebounded significantly compared with 2022.
However, there are uncertainties in the recovery and expansion of medium- and long-term household consumption. The most important thing is whether the operating conditions of enterprises can improve, which will lead to the improvement of employment expectations and labor income expectations? Can the real estate market and the capital market stabilize? Business conditions in both the manufacturing and services sectors improved, the data showed. In January 2023, the manufacturing PMI was 50.1%, an improvement of 3.1 percentage points from the previous month, and it has returned to the line of prosperity and decline since October 2022; the service industry PMI rose to 54.0%, a sharp rebound of 14.6% from the previous month. However, the improvement in the operating conditions of enterprises has not yet been transmitted to the employment sector. In January, the PMI employment items of the service industry and the manufacturing industry were 47.7% and 45.5%, respectively, still in the contraction range. Judging from the housing price index of 70 cities, the decline of the housing price index in the second-tier and third-tier cities in January was narrower than that in December, which were -1.1% and -3.9% respectively, but they were still in a downward trend. From the perspective of the capital market, the improvement trend is not significant. In January, the CSI 300 Index fell by 8.92% compared with the same period last year.
To sum up, although the autonomy of consumption has been strongly restored, the main factors that inhibit consumption demand have not undergone fundamental changes. From a mid- to long-term perspective, it is still uncertain whether the decline in residents’ consumption will be fundamentally reversed. Policymakers should focus on promoting consumption. Provide medium and long-term policy support.
3. Several Suggestions for Promoting Consumption
We believe that the key to boosting consumption is to effectively prevent the household sector from becoming a medium-to-long-term trend of “saving more and lending less”. Policy makers can start from two aspects: reducing debt repayment burden and increasing residents’ disposable income:
First, banks provide “refinancing” services to reduce the debt repayment burden of residents. Since the recent mortgage interest rate is lower than the interest rate of some existing loans, there is a phenomenon of queuing up to repay the loan ahead of time, which reflects the urgent need of the household sector to reduce the debt level. We suggest that commercial banks should launch refinancing (Refinancing) services to meet their needs and reduce the debt repayment burden of residents. The so-called refinancing is a financial service generally provided by American commercial banks, that is, after paying a certain handling fee, the borrower can change the loan interest rate and term of the existing mortgage loan to achieve the purpose of improving the debt structure and reducing the borrowing cost. For example, residents can obtain lower interest rates through refinancing services, thereby reducing debt pressure and increasing cash flow.
Second, the central government coordinates the issuance of consumer coupons. It is suggested that the central finance issue special treasury bonds and coordinate the issuance of consumer coupons to expand consumption. Although some scholars worry that due to incomplete income information in China, the government cannot accurately issue consumer vouchers to low-income groups, but the current priority is to restore and expand consumption and boost market confidence. We believe that the central government can issue consumer vouchers as a whole. Increase the disposable income of residents.
Note: This article only represents the author’s personal views
This article is edited by Xu Jin WeChat xujinft