MNI INTERVIEW2: China Must Stem Household Debt Surge-Advisor

China must act against an alarming rise in household debt but still avoid a painful house price crash, a former People's Bank of China monetary policy advisor told MNI, pointing to a property tax, continued tight controls on mortgage lending, and boosting the home rental market as policy options.

Regulators are exploring a potential property tax, touted in Chinese scholar circles for a decade, Li Yang, chairman of the National Institution for Finance & Development at Chinese Academy of Social Sciences, said in an interview. Such a levy could also help address worrying levels of local government debt, added Li, who now advises the Ministry of Finance.

China's household debt tripled over 16 years to 62.2% of GDP by the end of 2020. Mortgage loans accounted for more than half of total household debt by 2019, while household debt soared to 92% of disposable income in 2018 from 33% in 2004, according to the latest China National Balance Sheets data compiled by the NIFD.

The Covid crisis also prompted a surge in lending to small businesses, under government-sponsored emergency programs. Some of this lending may never be fully repaid, said Li, adding that the government, with its strong balance sheet, should assume the losses given the extraordinary circumstances of the pandemic.

While household debt levels surpassed those of Japan and Germany last year, Li said that measures to curb future growth must not trigger a slide in prices that could place homeowners in negative equities, as has already occurred in some lower-tier cities and even some peripheral areas of Beijing. Authorities should maintain controls on mortgage lending and house prices, he said.

OVERHEATING PROPERTIES

Primer Li Keqiang's Government Work Report in March called for a boost to rental homes, in a sign the overheating property market is causing concerns among policymakers, Li noted.

The property tax could be administered by local governments, he said, relieving some of their heavy debt burdens. While local governments' on-book debt is only 25.6% of the country's GDP, low by international standards, their off-balance sheet liabilities remain a "headache" despite efforts to swap liabilities onto their own books, Li said. Including Local Government Financing Vehicles (LGFVs), the country's overall government debt /GDP could be 30 percentage points higher than the current 45%, he said, citing his researchers. According to the NIFD, the debt raised by LGFVs, which the local governments are ultimately responsible for, amounts to about 30% of the national GDP.

Running down high-cost and risky financing vehicle debts will take time, Li said, adding that local governments may have to increase their own borrowing as a result. These administrations must also be more efficient in their investment, he added, pointing to spending on schools, medical care and culture in order to upgrade rural infrastructure.