Chinese Household Debt Surges Through the Pandemic

China’s household debt ballooned in the first half of the year, rising by about $380 billion, according to new Bank for International Settlements data. That increase was almost four times as large as the second-place U.S. And it compounds one of China’s biggest economic vulnerabilities.

It has been widely reported that China’s industrial production and exports have helped to power its recovery this year. But the other leg of the recovery is the continued rapid rise of real-estate investment, which is set to outstrip GDP growth again in 2020, as it has in 16 of the past 17 years.

Interest rates this year fell sharply in most countries, but the People’s Bank of China has resisted this trend. That means that whereas borrowers in the U.S. were at least able to refinance real-estate loans, Chinese borrowers are left with largely unchanged debt-servicing costs.

The reluctance to cut rates reflects the government’s concerns about previous rounds of let-it-rip credit growth, which have left the housing market displaying telltale signs of rampant speculation.

Hundreds of millions of units, equivalent to about a fifth of the urban housing stock, are estimated to be vacant. The rental market is still underdeveloped, but where it does exist, yields are typically well below those offered by government bonds. Banks that once lent primarily to industry have recorded ever-growing mortgage books. That already appears to be eating into China’s economic potential, as funding is redirected toward real estate and away from more productive uses.

A man promotes real estate at a street market in Wuhan, China, this week.

A man promotes real estate at a street market in Wuhan, China, this week.

Photo: aly song/Reuters

Given the varied spread of the pandemic and its wide-ranging effects on national accounts, debt to GDP metrics can be misleading at the moment. All the same, the economic impact on China has been relatively shallow—and household debt still rose by 3.9 percentage points as a share of output in the first six months of the year, more than most countries. That ratio now stands at 59.1% for China, above some advanced economies such as Germany, and far above South Korea or Japan’s levels at comparable stages of development.

Beijing has often expressed its desire to get the housing market and the debt it produces under control, but household leverage simply continues to climb year after year. Without a sharp, and potentially painful, change in course, the problem will only worsen—and the critical effort to boost flagging productivity growth may stumble.

Write to Mike Bird at Mike.Bird@wsj.com