Global investment banks (IBs) and capital markets are turning their attention to Greater China, the world’s largest manufacturing hub and the financial center of Asia. “Capital Hub” is a series covering news from China and the Greater China capital markets. From the mainland markets in Shanghai and Shenzhen to Hong Kong’s dollar liquidity hub and Taiwan’s semiconductor value chain, this series traces the flow of capital across the Greater China region and captures the current temperature and direction of these markets as Asia’s financial hub. [Editor’s Note]

[Edaily Marketin Reporter Won Jae-yeon ] Although China is lowering lending thresholds and even subsidizing interest rates to boost consumption—which has been slow to recover—the debt burden shouldered by households is actually hindering consumption. High-credit-rated borrowers are reducing their use of loans and credit cards due to concerns about employment and housing prices, while low-income and low-credit-rated individuals who need money immediately find it difficult to qualify for bank loans because of their existing debt.

This creates a paradox in which policies aimed at boosting consumption through increased lending are actually increasing the risk of delinquency. The more the government pushes for expanded lending, the more creditworthy borrowers shy away from loans, leaving only those with lower repayment capacity. As banks tighten their screening processes out of concern for bad debts, the credit loosened to stimulate consumption is once again leading to a contraction in lending.

China’s State Council unveiled the “15th Five-Year Plan for Expanding Consumption” in mid-month. As China’s first five-year plan dedicated solely to expanding household consumption, it aims to increase retail sales of consumer goods to around 60 trillion yuan (approximately 12,972 trillion won) by 2030. The plan aims to encourage households to spend by raising wages and property income, strengthening social security, and easing restrictions on car and home purchases.

The fact that China has devised a separate Five-Year Plan dedicated solely to consumption underscores the severity of the slump in domestic demand. For a long time, the Chinese economy has relied on real estate, infrastructure investment, and exports for growth. However, with the prolonged real estate slump and intensifying trade pressure from major trading partners, it has become difficult to sustain the existing growth model without cultivating household consumption as a new growth engine.

Households Cut Back on Loans Despite Interest Subsidies… Deposits Alone Rose by 1,660 Trillion Won

The first measure the government has implemented to stimulate domestic demand is consumer loans. Consumer loans are loans taken out to cover living expenses and purchase goods, rather than for home purchases or business capital. Earlier this year, Chinese authorities expanded a program under which the government subsidizes 1 percentage point of the annual interest rate if individuals use loans received from financial institutions for actual consumption. The annual subsidy limit per borrower from a single financial institution is 3,000 yuan (approximately 660,000 won). The aim is to revive consumption that requires large lump-sum payments, such as cars, home appliances, and furniture.

However, households are acting contrary to the government’s expectations. According to the People’s Bank of China, household loans decreased by 366.8 billion yuan (approximately 80.3 trillion won) in the first half of this year. Short-term household loans, which include credit cards and consumer loans, fell by 588.1 billion yuan (approximately 128.8 trillion won).

Conversely, household deposits rose by 7.58 trillion yuan (approximately 1,660 trillion won) during the same period. Although the government encouraged consumption, households opted to save rather than borrow. Amid ongoing concerns about housing prices, employment, and future income, households are reluctant to take on debt and spend money, even with low interest rates.

Households have particularly cut back on large-ticket purchases. In June, auto sales fell 16.1% year-over-year, while sales of home appliances dropped 8.7% and interior materials fell 10.5%. As housing prices continue to decline and employment remains uncertain, consumers are postponing purchases of non-essential items, such as cars and home appliances.

In the first half of this year, China’s per capita disposable income rose by 4.2% year-over-year in real terms (adjusted for inflation), but the growth rate of per capita consumer spending was limited to 2.7%. This indicates that households are prioritizing saving or paying off existing debt over spending their increased income.

Consumption Stifled by a Mountain of Debt… The Solution Lies in Income and Welfare

Behind households’ reluctance to take out new loans lie their already mounting debt and the risk of delinquency. Gavekal Dragonomics, a Chinese macroeconomic research firm, estimated that China’s non-performing household loans reached 2.22 trillion yuan (approximately 480 trillion won) last year, an increase of more than 20% from the previous year. This amounts to about 1.6% of China’s gross domestic product (GDP).

Experts view the rise in non-performing loans as a delayed consequence of last year’s efforts to boost consumption by lowering lending thresholds. They argue that while debt increased without a corresponding rise in income, and compounded by the real estate slump, households’ ability to repay has weakened. Since the start of this year, banks have been raising lending thresholds again by placing greater emphasis on salary income rather than property holdings when reviewing consumer loan applications.

In particular, the concentration of household assets in real estate is a key factor hindering the recovery of consumption. According to the China Economic Institute at Stanford University, approximately 70% of Chinese household assets are tied up in real estate, and it is estimated that a 10% drop in home prices leads to a 1.5–2.3% decline in household consumption. In other words, falling home prices lead not only to asset losses but also to a contraction in consumption.

Experts point out that to revive consumption, it is more important to strengthen household income and the social safety net than to lower lending rates. This is because, given the heavy burdens of healthcare, education, and retirement costs, households are likely to prioritize savings over consumption even if their income increases. They explain that consumption can only recover by increasing wages and transfer income and expanding welfare spending to alleviate anxiety about the future.

The Chinese government has also included measures in its latest five-year plan not only to support consumer loans but also to increase wages and property income and strengthen social security. However, it remains to be seen whether these policies will lead to income improvements and consumption growth that households can actually feel. Forecasts suggest that as long as real estate prices continue to fall and employment remains unstable, it may take a considerable amount of time for domestic demand to recover, even if additional stimulus measures are introduced.