Daily Management Review

The Economist: Asian population is drowning in debt


People in Asia are thriftier than in other regions of the world, and this is one of the most established views about the global economy. This belief is based on a culture associated with the self-discipline of Confucianism, history (memory of deprivation) and public policy (an unreliable social system forces people to save).

Whatever the real reason is, statistics have long maintained the assertion that Asian households are extremely cautious with their money. However, over the past few years, the region’s population has done everything possible to prove that thrift may have been only a transitional stage.

The debt burden of households in developed countries as a whole fell in percentage correlation to GDP after the global financial crisis of 2008, the Bank for International Settlements notes. However, this trend is moving in the opposite direction in a number of Asian countries.

The largest increase was recorded in China, where households occupied about $ 4.5 trillion over the past 10 years. Yet, the Chinese started from an extremely low point. With regard to income levels, South Korea, Thailand and Malaysia have achieved higher rates. Consumer debt also rose in Hong Kong and Singapore.

The increase in debt is to some extent a healthy phenomenon. Asian economies are often criticized for that they do not use their full potential in conditions of global growth. They produce a lot of things, but they hope that the prodigal people of the West will buy all this.

At least, the growing debt burden helped to change this dynamics, stimulating the increase in consumption. The population’s expenses on everyday goods in Asia, with the exception of Japan, grew by about 10% a year in the last five years. Greater access to credit facilitated purchase of housing, cars and clothing.

But debt can become a dangerous thing. The latest IMF report indicates that the growth of household borrowing contributes to economic growth and reduces unemployment in the short term. However, after a while, the positive effect can turn into a negative one.

IMF experts believe that a 5% increase in the ratio of households' debt to GDP over three years usually leads to a decrease in real growth of 1.25% over the next three years. And an increase in household debt burden by 1% increases the probability of a banking crisis by a similar percentage point.

Yet, financial fragility in Asia is not the main reason for concern. Even if the population borrows more, the regional regulators will remain as prudent as possible.

South Korea requires that mortgage loans do not exceed 70% of the value of real estate. Singapore home buyers applying for bank loans must make an initial contribution of at least 20% and potentially much more if they already have outstanding loans.

In addition, Asian banks are reluctant to sub-prime lending, which made consumer debt extremely "toxic" in America ten years ago, writes the British magazine The Economist.

Interest rates are the greatest risk for Asia, says Frederic Neumann, head of Asian Economic Research at HSBC. He notes that fixed long-term rates in the region are a rarity.

Most consumer loans have shorter terms, so if central banks begin to raise rates, the population's spending on debt servicing will grow. This will lead to a decrease in real income, and hence, to a decrease in consumption.

You can already see the first signs of the impending problem. Mortgage payments in China reached 4.5% of the total annual income of the population, compared with 3.6% in 2015, says research firm Gavekal Dragonomics. It starts to put pressure on consumption.

For the government, this was a kind of compromise. The increase in mortgage lending helped to reduce the number of unsold houses, which posed a more serious threat to the economy than consumer debts.

The growth of the debt burden is another threat. Just like in other regions of the world, unscrupulous lenders of Asia hunt for the most vulnerable part of the population. In South Korea, the share of low-income households that are struggling with an unbearable debt burden is steadily increasing.

Pae kun Choi, an economist at Konkuk University in Seoul, points out that the poor may have no choice but to take out loans to cover daily expenses and pay for medical care.

In China, online lenders were involved in a series of scandals. Some of them set unreasonably high interest rates and in some cases forced students to place nude selfies as collateral, with the threat that they would publish them on the Internet if the loans were not repaid.

source: economist.com