Beijing's risk-curbing measures could dent household loan growth

Household loan stock has already fallen from 24.7% to 20% in March.

As China tightens credit conditions to shun financial risks, household debt growth is expected to slow down in the next few months, BMI Research revealed. It said in a report that Beijing's decision could drive interest rates up and therefore discourage borrowing.

The People’s Bank of China (PBoC) noted that the total household loan stock which is at 20% by March is lower compared to April’s 2017 year-on-year rate of 24.7%. 

"This underpins our view that household debt growth will slow further over the coming quarters as Beijing’s decision to curb financial risks will lead to higher interest rates, which will weigh on household borrowing. Indeed, the one-year SHIBOR rate surged to an average of 4.49% in April 2018, from a low of 3.03% in August 2016," the firm added.

Chinese regulators have also been stepping up their supervision in the consumer loan market to prevent risks, which will act as a drag on household debt growth.

The China Banking Regulatory Commission (CBRC) tightened its scrutiny on mortgage loans that were disguised as consumer loans. Both PBOC and CBRC have committed to strengthening the monitoring of Internet financing and peer-to-peer loans in December 2017.

Despite the slowdown in household loans, household loans could still continue to grow at double digits and outperform overall loan growth. Domestic loan stock jumped 12.3% YoY in March, down from a peak of 12.8% YoY in November 2011.

"Whilst household debt growth will trend lower along with overall loan growth, difficulty in defaulting on household debt and an improvement in the personal credit system will result in more credit being diverted into the household sector. Indeed, a lack of personal bankruptcy laws in China means that households have a greater difficulty defaulting when compared with corporate debtors," BMI Research argued.

It also cited a move by Chinese courts to set up a nationwide system that will bar households who fail to repay their debts from doing some activities such as using airplanes and trains. The adoption of this system will further encourage the timely repayments of debt by the household sector, which could see the banking sector lend more to households, BMI Research thinks.

As a result, the proportion of consumer loans in the household loan market could rise and support private spending. Consumer loan growth hit 23.4% YoY and outperformed 20.3% loan growth in March. Moreover, consumer loans as a share of total household loans climbed to 77.9% in March, from 75.8% a year ago.

"Whilst Beijing has stepped up scrutiny in the consumer loan market, the rapid development of the fintech sector will partially offset headwinds from stricter regulations, allowing consumer loans to grow robustly," BMI Research added.