China's economic rebound remains unbalanced. Households continue to save more of their income than before COVID, sapping consumer spending. Much of this saving appears to be earmarked at finding a home in the property market. S&P Global Ratings believes that while this provides a short-term boost to growth and commodity prices, it reawakens thoughts of overheating in real estate, sets back a needed rebalancing, and threatens the recovery.

China's Households Still Saving More

China's households saved more of their disposable income during the first quarter of 2021 compared with the end of last year. Saving remains well above pre-pandemic levels, at almost 40% of disposable income. This is not what a recovery is supposed to look like, especially as income has recovered smartly.

Urban households are mostly saving more. Rural households, typically with less income, are also saving more (see chart). But these consumers have a smaller buffer, especially if job losses have dented their income, as we have seen among migrant workers.

What Will It Take For China's Households To Save Less?

China is not unique in that households across the world are saving more. The pandemic constrains spending on tourism and personal services, and uncertainty encourages people to add to their rainy-day funds. Still, we might have expected saving in China to fall faster than elsewhere given early success in containing the virus, which allowed for a swifter reopening and an improved outlook for jobs.

Securing a credible pandemic exit strategy could encourage households to save less. As across Asia-Pacific, China has suppressed but not defeated the pandemic. Periodic outbreaks are met with quick, aggressive, and targeted action to impose social distancing. While this has kept cases low, it leaves households uncertain about their prospects, especially as new variants strike.

While a global debate is ongoing about the notion of "herd immunity," recent experience in Asia indicates that any exit strategy needs population-wide vaccine coverage of 60% or above. We don't know whether 60% or 80% is the right number. Much will depend on new variants, vaccine efficacy, and vaccine hesitancy. Still, at current rollout speed, China will only hit this threshold in mid-2022.

What can policymakers do to jolt consumption in the meantime? Not much. Social safety nets, such as unemployment insurance, have broadened but remain shallow. Government-led household surveys indicate that state transfers did little to cushion the income shock in early 2020. If the government had little appetite for cash transfers in the first quarter of 2020, at the height of China's pandemic, there seems even less now.

China's households like to insure against shocks. The pandemic has fortified this behavior. This is an old problem and a key reason why, even before COVID, the country's consumers saved more than their peers in other nations.

Some policies have tried to help consumers, including temporary tax cuts. This has not been enough to convince households that the government will be there to cushion the blow of tomorrow's income shocks, thus giving consumers cover to spend today.

Save More, Think About Buying Property

It seems odd that consumers less confident about the future would want to buy more property. This is not only a substantial financial commitment but often requires borrowing, even if higher saving means a larger down payment. For China's households, though, property has long been considered a safe place to park saving.

House prices have steadily risen, giving some the impression it is a surefire means to generate a good return. The National Bureau of Statistics reports that the price per square meter of existing housing rose from Chinese renminbi (RMB) 4,480 in 2010 to RMB9,052 in 2020, an annualized return of more than 7%. There was only one year in which the average price was lower than the previous year--in 2014, prices dipped by less than 2%.

In contrast, the average annual total return of equities, measured by the CSI 300 index, has been about 6% over the same period (Jan. 1, 2010-Dec. 31, 2020), but with much more volatility. Two years in the past decade, 2011 and 2018, saw a total loss (including dividends) of more than 25%. Returns were negative in five years out of 10.

Bank deposits have not provided much competition for household savings either. The average interest rate on a one-year time deposit for the decade through to end-2020 was just 2.2%. It is currently 1.5%, just a little above core inflation.

Wealth management products (quasi-deposits offered by banks and trust companies) were popular in the middle of the decade, offering implicitly guaranteed returns often up to 5 percentage points above deposits. However, wealth management products in their previous form of high return and low risk are largely extinct following a crackdown by regulators.

Is Saving Flowing To The Property Market?

The data are circumstantial. We know urban households are saving more, mortgage borrowing remains brisk, and property sales are strong. Other sources of credit may be finding their way into real estate.

The National Bureau of Statistics reports that residential floor space sold for the year through April 2021 was over 20% higher than the average for the same period in the three years preceding COVID. This masks huge differences across provinces. In Fujian province, sales are 60% higher over the same period, while in Heilongjiang they are 14% lower. As always, property is as much a local as it is a national story in China.

Higher saving means larger down payment capacity, but most households still need a mortgage. Medium- and long-term consumer loans, most of which are mortgages, are growing at about 14% compared with the same period in 2020.

Regulators have been trying to cool housing markets. This includes tightening homebuyer eligibility and requiring banks to control the growth rate of their mortgage books. Banks in some cities, including Hangzhou and Shenzhen, have also started to hike mortgage rates, albeit marginally (often by less than 50 basis points). However, regulators have again recently become concerned about other sources of financing finding its way into the residential property market. This is a sign the property market in some areas of the country is hotter than regulators would like.

An additional challenge for regulators is that, even when they squeeze financing for developers, revenues from swift sales can be redeployed into land purchases and more construction. While this helps growth temporarily, it raises risks of oversupply down the road. As the experience of 2014 and 2015 proved, correcting an oversupply can be painful.

Property taxes could help local governments fund an enhanced social safety net while reducing speculative demand for property, hitting two birds with one stone. The government has started making noises about the property tax again, and pilots have been underway in some tier-one cities. We note, however, that this tax has been discussed for years and never finds its way into hard legislation, in part due to pushback from vested interests.

Tricky Transition Creates Headwinds To Growth

The goldilocks scenario for the economy is that consumers feel more confident, spend more, and save less. At the same time, demand for property would soften. Stronger private consumption would offset weaker real estate investment and all the upstream activity it entails. This would keep growth on track. The risks of an overheating property market would subside.

We expect housing policy to tighten if consumers stay cautious and saving keeps flowing to real estate. Without an offsetting rise in consumption, this would mean a net drag on growth. Our baseline forecast of 8% growth for 2021 already incorporates a version of this tricky transition, with an imperfect handoff from real estate to consumption.

There is an emerging upside to this scenario, however, as China's vaccine rollout gathers pace. If the government can sustain the recent pickup in vaccination speed, widespread population coverage could be achieved by end-2021. This would encourage consumers to saves less and, as a byproduct, cool demand for property.

Related Research

• China Banks May Still Have RMB3 Trillion In Shadow Assets By Year-End Deadline, April 26, 2021
• China Property Watch: The Margin Slide Is Far From Over, March 31, 2021