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27 Jun 2014

Asia’s borrowing splurge

Frederic Neumann

by Frederic Neumann

Co-Head of Asian Economic Research, HSBC

Asia’s borrowing splurge

Consumer spending in Hong Kong and other Asian economies is often financed through credit

Household debt contributed to the consumer spending boom in the US in the run-up to the global financial crisis, rendering financial systems vulnerable to a sharp correction.

The optimists argue that is unlikely to occur in Asia, where people tend to be more prudent and save more of their monthly income. Well, not necessarily.

In recent years, consumer debt has surged across Asia, financing purchases of flashy new condos, cars, motorcycles and everything else the heart desires.

Consumer debt has surged across Asia, financing purchases of flashy new condos, cars, motorcycles and everything else the heart desires

Consumer debt increased relative to GDP between 2007 and 2013 in all major Asian economies except India. Malaysia, Taiwan and Thailand now have higher consumer debt ratios than the United States even if they are still below the US level in 2007. Korea and Singapore also have elevated ratios.

While household debt in Vietnam, India, Indonesia and the Philippines is still relatively low, in China it has climbed notably.

The rise in consumer leverage in Malaysia and Thailand is especially striking. It may include personal loans to some small business owners, but the trend suggests that consumers have taken on much more debt of late. As a share of GDP, household debt in those countries now exceeds that in the US, with the pace of increase steeper than the West experienced before 2008.

Academic studies suggest the pace of increase in debt matters more than its level in generating financial risks. In Thailand and Singapore, the rise in household debt over the past six years has exceeded that in the US in the run-up to the global financial crisis. In Malaysia, China, Hong Kong and Korea consumer leverage has grown faster than in many Western economies before 2007, with Indonesia only slightly behind.   

True, household lending terms in Asia are usually stricter: loan-to-value ratios for mortgages, for instance, are far lower than in the US and the UK. Also, no complicated derivatives obscure risk. A sudden blow-up is unlikely. But even so, the issue is troubling: it implies consumer spending is largely driven by leverage and it is sensitive to a tightening in financial conditions, whether caused by regulatory scrutiny or a broader rise in funding costs.

Contrary to common perception, not all Asia’s consumer lending is for housing: quite a large share of credit finances consumption directly, through credit cards or auto loans, for instance. So while the region’s household debt may not be as big a systemic financial risk as it was in the West, without it, just how resilient would Asian consumption spending really be?

This research was first published on 20 June 2014.
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