The FINANCIAL — According to Fitch Ratings-Shanghai, direct risks associated with China’s household debt are low for the sovereign rating (A+/Negative), but some emerging pockets of stress could affect banks, securitised assets and other lenders, says Fitch Ratings. Household debt growth in China has slowed significantly, with the household debt/disposable income ratio rising slightly to 115% in 2023, from 112% in 2022, and remaining moderate on a global scale.
“The trajectory of household debt mirrors trends in the country’s housing market and, to a lesser extent, is reflected in tepid consumer loan demand. We believe China’s economic growth could slow if households begin to reduce debt more aggressively, which would further slow growth in bank retail loans and pressure bank profitability. We do not believe the rapid expansion in household debt that was seen over much of the past decade will recur in the next decade amid shifting government policies”, according to Fitch Ratings.
“Asset quality indicators for banks, securitised auto-loan, mortgage and consumer-loan transactions have shown modest deterioration since 2022. Risk should be mitigated by moderate original loan/value ratios in mortgages, which constitute around 60% of household debt, along with high household savings, but tail risk could emerge among certain population segments. Declining property prices could reduce borrowers’ incentive to repay mortgages, but we believe the risk is contained due to China’s dual recourse system”.
“A weaker income outlook may strain debt repayment capacity for some borrowers and contribute to a shift towards riskier credit profiles in loan portfolios. Unfinished homes still pose a greater risk for banks despite government efforts to complete stalled construction projects, although the exposure of our rated Chinese banks to the affected mortgages remains small. The uptick in operating loans, a portion of which are secured by real-estate, could also pressure banks’ asset quality”, Fitch Ratings concludes.
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