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2017-11-07 08:56:34
What should be good news for the global economy has its downsides
ONE of the more persistent beliefs about the global economy is that Asians are
more frugal than others. Explanations have drawn on culture (the
self-discipline of Confucianism), history (memories of privation) and public
policy (flimsy social safety-nets forcing people to save). For Lee Kuan Yew,
the founding father of Singapore, and other theorists of Asian values , thrift
was one of them. Whatever the true reason, data long supported the basic claim
that Asian households were indeed careful with their cash. But over the past
few years consumers across the region have done their best to prove that
prudence was perhaps just a passing phase.
Household debt in advanced economies has generally declined as a percentage of
GDP since the 2008 global financial crisis, according to the Bank for
International Settlements. In a number of Asian countries, however, it has been
going in the opposite direction (see chart). The biggest increase has been in
China, where households have borrowed about $4.5trn over the past decade. But
Chinese households were starting from an extremely low base. Relative to income
levels, South Korea, Thailand and Malaysia have reached much loftier heights.
Over the same period, consumer borrowing has also risen in Hong Kong and
Singapore.
The increase in debt is, to a certain extent, healthy. An oft-heard criticism
of Asian economies is that, in terms of global growth, they have been punching
below their weight. They produce lots of stuff but rely on profligate
Westerners to buy it. The rise in debt has, so far at least, helped change that
dynamic, fuelling more consumption. Retail spending in Asia, excluding Japan,
has grown by about 10% a year over the past half-decade. Greater access to
credit has made it easier to buy homes, cars and clothes.
But debt can also be dangerous. A recent paper by the IMF observed that, in the
short term, an increase in household borrowing props up economic growth and
keeps unemployment down. After a while, though, these gains are reversed. The
IMF study found that a five-percentage-point increase in the household
debt-to-GDP ratio over three years tends to result in a 1.25-percentage-point
decline in real growth three years in the future. And an increase of a single
percentage point in household debt increases the likelihood of a banking crisis
by a similar percentage.
In Asia financial fragility is not the main worry. Even if households have been
indulging themselves more freely, most regulators have remained prudent. In
South Korea they mandate that mortgages cannot exceed 70% of a property s
value. Singaporean homebuyers who borrow from banks must make downpayments of
at least 20% and potentially much more if they already have outstanding loans.
Asian banks are also reluctant to pursue the kind of subprime lending that made
consumer debt so toxic in America a decade ago.
The bigger risk in Asia is interest rates, says Frederic Neumann, co-head of
Asian economic research at HSBC. He notes that fixed long-term rates are rare
in the region. Most consumer loans have shorter durations, so if central banks
start to increase rates, debt-servicing costs for households will quickly rise.
That will eat into incomes and act as a drag on consumption.
It is already possible to detect headwinds. Mortgage payments in China have
reached about 4.5% of total annual household income, up from 3.6% in 2015,
according to Ernan Cui of Gavekal Dragonomics, a research firm. That, in turn,
is beginning to weigh on consumption. For the government this entails a
trade-off. The increase in mortgages has helped reduce a glut of unsold homes,
which posed a graver danger to the economy than does consumer debt.
There is also an uglier side to the rise in household borrowing. As in other
parts of the world, unscrupulous lenders prey on the most vulnerable. In South
Korea the share of low-income households struggling under heavy debt burdens
has been creeping up. Choi Pae-kun, an economist at Konkuk University in Seoul,
points out that poorer people may have no choice other than to borrow to cover
living and medical costs. In China online lenders have been involved in a
series of scandals. Some have demanded exorbitant interest rates and, in a
number of cases, forced students to post as collateral naked selfies, with the
threat they could be distributed if dues are not paid. Debt can undermine Asian
values in more ways than one.
https://www.economist.com/news/finance-and-economics/
21730932-what-should-be-good-news-global-economy-has-its-downsides-asian-households