BEIJING (Reuters) - High leverage is the biggest risk facing China’s economy as debt has piled up despite government efforts to deleverage, exposing the world’s second-largest economy to systematic financial risks, a former finance minister was quoted as saying on Friday.
Household debt has crept up to about 50 percent with a shift in consumption habits and record mortgage lending last year, Lou Jiwei, former finance minister and chairman of China’s National Council for Social Security Fund, said during a forum in Beijing, according to state television CCTV.
Lou also stressed there was a silver lining to some recent default cases involving local governments that failed to pay off their debt, as they sent a strong message that the central government would not bail them out.
“It’s a good thing, educating the market that whether you are a state-owned or private company, you will have to take responsibility if you default on your debt, nobody will save you,” he said.
Data from the Bank for International Settlements showed China’s household debt as a proportion of gross domestic product (GDP) had more than doubled to 43.2 percent in October in less than 10 years. While developed nations have higher rates of household debt, Chinese families are much more leveraged because income is lower and so proportionately the costs of social welfare, from pensions to healthcare, are much higher.
China’s total private and public debt has exceeded 250 percent of GDP, up from 150 percent before the global financial crisis, according to the Organisation for Economic Co-operation and Development (OECD).
Lou said the Chinese economy had not hit the “Lewis Turning Point”, a tipping point where there is no surplus of rural labour and urban wages rise dramatically, but he remained cautious about China’s economic outlook, saying it may stick to an “L-shaped” pattern of “horizontal” growth.
Reporting by Yawen Chen and Kevin Yao; Editing by Robert Birsel