As Beijing steps up its efforts to wean the Chinese economy off an excessive debt-rich diet it seems ready to exchange short-term pain for long-term gain.
In that respect China has made some progress, with corporate debt as a percentage of GDP holding at around 160% for the last two years even as the real economy has grown by nearly 15%.
However, relatively little attention has been paid to China’s soaring household debt as credit has continued to expand at a retail level. China’s household debt-to-GDP ratio reached a record 53.2% as of the end of last year, up from 18.2% before the 2008 global financial crisis.
As a result, P2P loans in China grew by 128% between 2014 and 2017 on a compounded basis and reached Rmb1.2 trillion ($176 billion) as of the end of last year.
The boom in P2P lending is not unique to China. What perhaps sets it apart, though, is that much of the borrowed money was invested in stocks, bonds and properties, rather than used to fund consumption, as in the US.
The worst part is that P2P loans allow borrowers to extend their credit. As with credit cards, Chinese P2P borrowers can take out loans from new P2P lenders to pay out their existing debt, potentially masking any underlying problems. So in essence these P2P lenders may have been largely financing each other’s liabilities.
As such, China's P2P crunch is a natural adjunct to China’s broader deleveraging campaign; whether its debt-laden zombie firms at the institutional level or P2P borrowers at the retail level, it is always the weakest credits that get exposed first when the tide goes out.