Financial Expert Warns of Impending Subprime Mortgage Crisis in China

Financial Expert Warns of Impending Subprime Mortgage Crisis in China
Applicants are looking at the housing models in the application center in Kof Fu, Kowloon, Hong Kong on April 11, 2018. (Miguel Candela/SOPA Images/LightRocket via Getty Images)
4/18/2018
Updated:
4/26/2018

China is likely to have a financial crisis, as its citizens’ savings growth rate turned negative last year for the first time, according to a Chinese financial expert.

According to the statistics from the Central Bank of China, from January to November 2017, citizens’ savings increased by 3.82 trillion yuan ($608 billion). Compared to the increase of 4.54 trillion yuan ($723 billion) during the same period in 2016, savings decreased more than 700 billion yuan ($115 billion)—almost 16 percent.

Li Yang, former vice president of the state-run Chinese Academy of Social Sciences and chairman of the Beijing-based think tank National Institution for Finance and Development, made some predictions about the future of China’s economy during the Bo’ao economic forum, an annual summit for leaders in government, business, and academia throughout Asia, held this year on the island of Hainan, China.

While answering a reporter’s question on April 9, Li said that if the negative growth rate continues, citizens could incur large amounts of debt. Similar conditions—leading to the collapse of a housing bubble—led to the subprime mortgage crisis in the United States back in the late 2000s, which precipitated the Great Recession.

Li Guang, an unemployed farmer who was evicted from his home to make way for the Loudi City Construction and Investment Co.-financed sports stadium, walks into a temporary village near the stadium, in Hunan Province, China, on June 17, 2011. (Adam Dean/Bloomberg via Getty Images)
Li Guang, an unemployed farmer who was evicted from his home to make way for the Loudi City Construction and Investment Co.-financed sports stadium, walks into a temporary village near the stadium, in Hunan Province, China, on June 17, 2011. (Adam Dean/Bloomberg via Getty Images)
To stimulate economic growth, central planners targeted residential real estate in 2016. As mortgages made up 40.5 percent of new bank loans in 2016, house prices rose more than 10 percent. By the end of 2016, the average Chinese spent more than 160 times his annual income to purchase a housing unit, according to previous Epoch Times reports.

To avoid a financial bubble, Beijing’s central planners then tightened housing regulations and lending at the beginning of 2017. Banks increased mortgage rates above the central bank’s benchmark lending rate of 4.9 percent.

Because of the high housing prices and mortgage lending rates, Chinese citizens had to spend much more of their savings on their real estate investments.

A woman who was evicted from her home to make way for the Loudi City Construction and Investment Co.-financed sports stadium cooks in a shelter used as a kitchen in Hunan Province, China, on June 17, 2011. (Adam Dean/Bloomberg via Getty Images)
A woman who was evicted from her home to make way for the Loudi City Construction and Investment Co.-financed sports stadium cooks in a shelter used as a kitchen in Hunan Province, China, on June 17, 2011. (Adam Dean/Bloomberg via Getty Images)
China’s total debt is massive, at 2.55 times its gross domestic product), according to the International Monetary Fund. In Li’s analysis, when both government and corporations are in debt, the debt burden falls on private individuals and their savings. However, if all three sectors are in the red, economic growth becomes dependent on inflation or financial bubbles—which would ultimately lead to a financial crisis, Li said in an interview with Chinese media Ifeng News published on April 12.

“Economic growth will have to depend on the central government (i.e., central bank) to release more money. It indicates that the economy is already highly unbalanced,” Li said. With more money in circulation, the currency’s value drops.

Liu Yi contributed to this report.
Recommended Video: