There has long been a saying that ‘when the US sneezes, the UK catches a cold’, which is a reference to how a downturn in the US economy will ultimately cause an economic downturn here in the UK, as we clearly saw in 2006-2008 with the collapse of the US sub-prime mortgage market and the onset of the global financial crisis.
However, the Chinese economy is now more than two-thirds of the size of the US economy and the gap is closing every year so it should also be the case that ‘when China sneezes, the UK’…I have just realised that this is not a very appropriate analogy given the current global pandemic, but you get the point.
The Chinese have been borrowing heavily since the global financial crisis started. According to the Bank of International Settlements, in the 12 years between Q4 2008 and Q4 2020, Chinese non-financial corporations increased their debt almost 6-fold, the Chinese government increased its debt 8-fold and households (including mortgages) increased their debt 10-fold. As a comparison, the UK saw an increase in household debt of around 10% during the same period, which was 100 times slower than the debt increase in China over the past dozen years.
However, it is also worth noting what a low debt level China was starting from back in 2008, plus how much faster the Chinese economy has been expanding, and even at the end of 2020, total household debt in China was just over 62% of GDP, compared to around 90% of GDP in the UK. But whenever you have such a rapid rise in debt accumulation, as we have seen in China in recent years, there is always a likelihood that a bubble will be created because salaries will nearly always fail to keep up with the growth in property prices.
Chinese real estate
There are a number of reasons to be concerned about the Chinese residential property market, which is now more than twice the size of the US residential market, according to Goldman Sachs. Home price to income ratios are much worse than in the West and recent volume data suggests a clearly weakening housing market in the country.