Chinese Income Dislocations Could Be Ominous

Tiny items of data can sometimes say so much. State debts in China may be no worse than most other countries, even allowing for the hidden debts of provincial and local entities. But for anyone looking for a guide to the future should look at the miserable level of net household wealth, and its composition.

According to new figures, the average urban household had net wealth of RMB1.6 million (US$227,338). That may seem not too bad. It is only about a third of its US equivalent but started from a tiny base so might be assumed to keep on growing rapidly.

However, look more closely and it turns out that 70 percent is represented by real estate, mostly owner-occupied. China society is legendary for its mystical belief in the benefits of property ownership. Income-earning assets – bank deposits, bonds, shares – are at a miserable level. In the US for instance, real estate averages only about a third of household assets and the figure is lower in many European countries.

Nor can Chinese households rely on increases in real estate wealth. The median age of the population has already caught up with the US at 37 years and by 2030 is estimated to be 47 years compared with 43 in the US. The consequences of zero growth in overall population and declining amounts of new household formation due to aging are about to kick in.

Meanwhile, about 40 percent of households are said to be saving nothing, with the top 10 percent of earners providing 80 percent of household savings.

Of course, there is still some rural-urban migration and upgrading which will help urban real estate demand perhaps for a few more years. Chinese households seem fixated on property ownership as a safe investment so may continue to keep demand and pricing higher than the demographics suggest.

If so, they are digging an even bigger pit for themselves in the future, when China may even find itself with a surplus of housing and households with an asset which cannot easily be realized and short of the financial assets necessary to provide an income stream.

Absurdly low interest rates around the world have caused asset price rises in multiple countries and set problems for the future. But the longest lasting problem will be in those countries with declining demographics and excessive reliance on real estate for household savings.