The Asian Debt Tightrope

Asia has undoubtedly seen some exceptional growth this century. The largest continent has tripled its total financial wealth since 2006, reaching an estimated 140 trillion dollars with Asia ex-Japan potentially already having overtaken the U.S. in total financial wealth as well. However, this growth has come at a cost – a dreadful setting of swathes of borrowing, driving up overall global debt to an absurd 400 trillion dollars. While sovereign debt has grabbed the headlines, a more subtle but growing momentum has been gathering air behind the scenes in Asia – household debt. There is no place in the world where the household debt-to-GDP ratio has escalated quicker than in the Asia-Pacific region.
For the ambitious leaders of tomorrow, this should serve as more than just a macro-economic indicator – it is a key piece of a much larger strategic equation which requires a subtle understanding of risk and positioning in markets as well as the resilience of societies. The emergence of Asia as the celebrated growth story, often described as the engine of economic growth in the 21st century, is held on balance sheets that may not be as rosy at all.
An Uncomfortable Truth
It is easy to tempt the observer to disregard high household debt on the basis that it is but a byproduct of prosperity and may even be desired in becoming a developed economy. However, the rise of the whole of Asia is not exactly true to this equation. Pockets, such middle-income Asian economies as China, Thailand, Vietnam and Malaysia, for example, already have household debt-to-GDP ratios surpassing many high-income ones. South Korea, a high-income outlier, saw that ratio rise from around 32% in 2012 to nearly 55% now. Combined household debt in Korea, China, Hong Kong, Thailand and Vietnam increased nearly 30 percentage points of their total GDP over the decade running up to the pandemic – a rate that is uncomfortably similar to the run-up to the Great Recession in the U.S.
Both the proliferation of debt-driven investments and the excessive, disproportionate growth of debt, in turn, can – as economic history cautions – slow subsequent growth and intensify future recessions. It diverts the disposable income on spending to the servicing of debts, with usually-safe property markets reduced to shaky positions.
The drivers of this expansion are complex. Though demand for homeownership in the region can be characterized as a strong cultural imperative (e.g. 90% in China), a compelling argument is supply-side pressures, including the high availability of loan resources provided by deep-pocketed Asian banks, that are among the primary culprits. These banks, which have accumulated enormous resources through years of high savings rates, are lending aggressively at times at low rates, ensuring it trickles down to even low-creditworthy households.
As a result, the ratio of household debt-per-person has increased commensurately faster compared to GDP in real terms in almost all East Asian countries, leaving a significant gap of approximately three percentage points or above in Vietnam, China, the Philippines, Thailand and South Korea. This is essentially the socio-economic counterpart of a corporation doubling or tripling sales, but with profits dead in the water.
Japanification Risks: Debt composition only adds to the risk. A mind-boggling 60-80% of household assets in Asia are saturated in non-liquidilized non-financial real estate, compared to far more liquid Western wealth profiles. Structural illiquidity coupled with excessively high housing costs in cities (e.g. decades of discretionary income to save up an apartment in Hong Kong, China or Korea), is a dismal prospect. With most housing loans in, say, Korea at variable interest rates, an increase in the rate would become a potent destabilising factor, posing an impending disaster of a cascade of defaults and a free fall in asset values.
Reverberations of Japan’s “lost decades”, occasioned by a property market slump combined with a rapidly ageing population (the median age for a Japanese person is nearly 50), are all too familiar in the overall region. Demographic tailwinds are daunting with a continuing decline in populations in Korea, China, Thailand and Vietnam, and very little immigration to counter that.
Added to the problem of extremely unaffordable housing rates and the ageing population of those in need of retirement housing (with some Chinese banks now offering mortgages to those up to 80-95 years old), is the threat of forced property-price corrections and exacerbated burdens of personal debt among retirees. The risks are no longer hypothetical.
Building Resilience
What then is the strategic imperative to businesses and policymakers? This is clearly not an issue which is susceptible only to twiddling at the demand side. Priorities clearly need to be directed towards supply-side solutions and higher financial stability on the household scale.
In the case of financial institutions, this involves abandoning aggressive lending practices made on the basis of supply and adopting a more sustainability-driven approach with greater focus on the sale of products more suitable to its customers. This requires the innovation of tailored financial products and services that recognize unpredictable cash flows and biases in behavior. Consider flexible savings, cheap insurance (sorely needed in India where 95% of its near-1.4 billion population are not insured), and appropriate investment instruments. The average Indian household, with 84% of wealth in real estate and 56% in unsecured debt, for example, is in dire need of diversification and formal investment engagement.
Governments, on the other hand, have a strategic imperative in encouraging the affordability of renting low-income housing solutions using the mechanism of a public housing program. This involves the necessity to overcome funding issues and societal stigma. More importantly, it implies the investment in solid financial literacy programs which truly improve knowledge of risk and long-term perspective. This state of desolation is well supported by the different rates of financial literacy in Asia (e.g. Indonesia and Malaysia both under 40%, and even Singapore only around 60%).
The Asian economic story is changing. Years of unstoppable rise powered by seemingly unlimited debt growth may be giving way to a time of reckoning. The topic requires vision and a lot of strategic forethought.
To future business leaders, the reasons to comprehend and know the financial stability of households are far beyond an intellectual pursuit. It is imperative to ensuring strategic positioning in the market, reduction of risks and delivering a more equitable and stable future to the region. The opportunity isn’t just to capitalize on Asia’s growing wealth, but also to establish a sound financial system and households that can support it for decades to come.
–Further reading: “Household Financial Stability Should Underpin Asia’s Path to Prosperity” (Asian Development Bank blog)