Is the household sector over-indebted in China? – the perspective of economic growth and financial risks
Abstract
In this paper, we introduce household debt into a general equilibrium model and investigate the sources of changes in household debt through the lens of leverage constraints of the household sector, firms, and banks. Based on this, we analyze the impacts of household debt on economic growth and the financial risks embedded in debt-stimulated economic growth. After fitting our model to the data from China, we find that the increase in household debt in China is conducive to economic growth as it promotes demand growth and reduces financial frictions. In addition, the marginal financial risk induced by the growth of household debt is relatively small, implying that the increase in household debt can some- what promote economic growth without accumulating much endogenous vulnerability in the economy. This contrasts with the reduction of firms’ debt, which leads to drastic negative economic fluctuations in the short term, although it is beneficial to economic growth in the long run given that firms have already been caught in a vicious debt-deflation cycle. Therefore, to ensure the stability of the economy in China, it is plausible to squeeze out firms’ debt through increasing debt in the household sector.
First published online 12 February 2025
Keyword : household debt, leverage, economic growth, financial risk
How to Cite
Liu, Z., Zheng, X., & Zou, F. (2025). Is the household sector over-indebted in China? – the perspective of economic growth and financial risks. Technological and Economic Development of Economy, 1–23. https://doi.org/10.3846/tede.2025.22299
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Zabai, A. (2017). Household debt: Recent developments and challenges. BIS Quarterly Review.
Zhang, X. J, Chang, X., & Liu, L. (2019). Structural deleveraging: Process, logic and prospects – China’s deleveraging 2017 annual report. Economic Perspectives, (05), 16–29.
Zhou, H., & Wang, Q. (2009). Monetary policy and asset price volatility: Theoretical model and empirical study in China. Economic Research Journal, 44(10), 61–74.
Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2011). The real effects of debt (BIS Working Paper No. 352). Bank for International Settlements.
Chang, C., Chen, K., Waggoner, D. F., & Zha, T. (2016). Trends and cycles in China’s macroeconomy. NBER Macroeconomics Annual, 30, 1–84. https://doi.org/10.1086/685949
Chen, X., & Huang, B. (2022). Household consumption quality and debt leverage: Theory and evidence. Shanghai Journal of Economics, (8), 34–45.
Christiano, L. J., Motto, R., & Rostagno, M. (2010). Financial factors in economic fluctuations (ECB Working Paper No. 1192). European Central Bank. https://doi.org/10.2139/ssrn.1600166
Christiano, L. J., Motto, R., & Rostagno, M. (2014). Risk shocks. American Economic Review, 104(1), 27–65. https://doi.org/10.1257/aer.104.1.27
Debortoli, D., & Gali, J. (2017). Monetary policy with heterogeneous agents: Insight from TANK models (Economics Working Paper). Universitat Pompeu Fabra. https://EconPapers.repec.org/RePEc:upf:upfgen:1686
Dong, F., & Xu, Z. (2020). Cycles of credit expansion and misallocation: The good, the bad and the ugly. Journal of Economic Theory, 186, Article 104994. https://doi.org/10.1016/j.jet.2020.104994
Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica, 1(4), 337–357. https://doi.org/10.2307/1907327
Financial Consumer Rights Protection Bureau of People’s Bank of China. (2022). China inclusive finance index analysis report (2021). http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/4671788/index.html
Geanakoplos, J. (2010). The leverage cycle (Clowles Foundation Discussion Paper No. 1715R). https://doi.org/10.2139/ssrn.1539483
Gertler, M., & Gilchrist, S. (2018). What happened: Financial factors in the great recession. Journal of Economic Perspectives, 32(3), 3–30. https://doi.org/10.1257/jep.32.3.3
Gertler, M., & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis. Handbook of Monetary Economics, 3, 547–599. https://doi.org/10.1016/B978-0-444-53238-1.00011-9
Gertler, M., & Kiyotaki, N., & Prestipino, A. (2017). A macroeconomic model with financial panics (International Finance Discussion Paper No. 1219). https://doi.org/10.17016/IFDP.2017.1219
Hao, Q., & Chen, J. (2012). Housing age, depreciation rate and housing price: An empirical study based on Shanghai data. World Economic Papers, (6), 64–77.
Higgins, P., & Zhan, T. (2015). China’s macroeconomic time series: Methods and implications (Working Paper). Federal Reserve Bank of Atlanta. https://www.atlantafed.org/-/media/documents/cqer/researchcq/china-macroeconomy/ChinaTimeSeries_WorkingPaper.pdf
Iacoviello, M. (2015). Financial business cycles. Review of Economic Dynamics, 18(1), 140–163. https://doi.org/10.1016/j.red.2014.09.003
Iacoviello, M. (2005). Private debt and idiosyncratic volatility: A business cycle analysis (Society for Economic Dynamics Meeting Paper No.186).
Levine, R., Loayza, N., & Beck, T. (2000). Financial intermediation and growth: Causality and cause. Journal of Monetary Economics, 46(1), 31–77. https://doi.org/10.1016/S0304-3932(00)00017-9
Li, C. F., Liu, J. J., & Chen, Y. X. (2014). The crowding out effect of housing price rise on residents’ consumption in China. Statistical Research, 31(12), 32–40.
Li, R. Y. (2016). International comparison and enlightenment of the leverage ratio of the residential sector. Journal of Finance and Economics, 6(1), 23–27.
Liu, L., & Wang, Y. (2018). Household leverage and financial stability. China Opening Journal, 196(1), 20–25.
Liu, X. G., Liu, Y. C., & Wang, J. (2018). Leverage, economic growth and recession. Social Sciences in China, (6), 50–70+205.
Liu, X. H., Zhou, Y., & Mu, Y. (2017). Study on the path of re-balancing of balance sheet by enterprise de-leveraging and household leveraging: From the view of stock market. Nankai Economic Studied, (3), 111–126.
Long, H. M., & Wu, D. (2022). The effect of real leverage on economic growth: Based on the moderating effects of financial stability. Journal of Financial Research, 506(8), 38–54.
Ma, Y., & Chen, Y. L. (2017). Financial leverage, leverage volatility and economic growth. Economic Research Journal, 52(6), 31–45.
Nakamura, F. (2023). Household debt and borrower-based measures in Finland: Insights from a heterogeneous agent model. IMF Working Papers, 2023(262), 1–19. https://doi.org/10.5089/9798400263132.001
Pan, M., & Liu, Z. Q. (2018). Does “adding leverage” stimulate household consumption? Evidence from Chinese household survey. Journal of Financial Research, 454(4), 71–87.
Peng, Y., Huang, X., & Shen, J. (2018). Real estate investment and financial efficiency: Regional variation in shifting financial resources from real to fictitious sector. Journal of Financial Research, 458(8), 51–68.
Teulings, R., Wouterse, B., & Ji, K. (2023). Disentangling the effect of household debt on consumption. Empirical Economics, 65, 2213–2239. https://doi.org/10.1007/s00181-023-02428-4
Tobin, J. (1993). Price flexibility and output stability: An old Keynesian view. The Journal of Economic Perspectives, 7(1), 45–65. https://doi.org/10.1257/jep.7.1.45
Urban Household Assets. (2020). Survey on assets and liabilities of urban households in China in 2019. https://mp.weixin.qq.com/s/LfLwbHgjxGMwE2PHnqQO4Q
Wagner, W. (2010). Diversification at financial institutions and systemic crises. Journal of Financial Intermediation, 19(3), 373–386. https://doi.org/10.1016/j.jfi.2009.07.002
Wang, P., & Hou, C. Q. (2017). Expectation shocks, house price movements, and economic fluctuation. Economic Research Journal, 52(4), 48–63.
Wang, Y. Z., Luo, N. S., & Liu, W. B. (2019). What leverage is beneficial to firm innovation. China Industrial Economics, (3), 138–155.
Zabai, A. (2017). Household debt: Recent developments and challenges. BIS Quarterly Review.
Zhang, X. J, Chang, X., & Liu, L. (2019). Structural deleveraging: Process, logic and prospects – China’s deleveraging 2017 annual report. Economic Perspectives, (05), 16–29.
Zhou, H., & Wang, Q. (2009). Monetary policy and asset price volatility: Theoretical model and empirical study in China. Economic Research Journal, 44(10), 61–74.