The long‐term impact of household debts on household consumption

• Published date: 01 June 2024
• Author: Zhuyun Xie,Yuzhe Xie,Yue Liu,Guoliang Xu,Biao Xu
• Date: 01 June 2024
• DOI: http://doi.org/10.1111/asej.12331

ORIGINAL ARTICLE

The long-term impact of household debts on household

consumption

Zhuyun Xie

1

| Yuzhe Xie

2

| Yue Liu

1

| Guoliang Xu

3

|

Biao Xu

4

1

School of Finance and Economics, Jiangsu University, Zhenjiang, Jiangsu, People’s Republic of China

2

Faculty of Finance, City University of Macau, Macau, People’s Republic of China

3

School of Big Data and Statistics, Anhui University, Hefei, Anhui, People’s Republic of China

4

School of Government Management, Nanjing University, Nanjing, Jiangsu, People’s Republic of China

Correspondence

Biao Xu, School of Government Management, Nanjing University, Nanjing, Jiangsu, People’s Republic of China.

Email: xubiao@nju.edu.cn

Funding information

Humanities and Social Science General Programs sponsored by the Ministry of Education of China, Grant/Award

Number: 18YJA630119; Natural Science Foundation of China, Grant/Award Numbers: 71874080, 72004082,

72374101; Jiangsu Natural Science Foundation, Grant/Award Number: BK20180852

Abstract

Using panel data from 2012 to 2018, this article investigates the long-term impact of house-

hold debt on household consumption, which is very important to the sustainable develop-

ment of economy. The result shows that total household debt has a significant crowding-out

impact on long-term household consumption, whereas nonhousing debt has no significant

effect on it. In addition, we also find that the debt of high-asset families has a weaker impact

on long-term household consumption; the debt of rural families, however, has a greater

crowding-out effect, which means that increasing rural families’leverage will have a greater

negative impact on household consumption. Finally, household debt’s negative effect on

long-term consumption was not found in older families, whereas it is found at significant

level in middle-aged families. The above results have important implications for China’s pol-

icy to stimulate consumption and promote sustainable economic development.

KEYWORDS

household consumption, household debt, housing debt, nonhousing debt, sustainable economic

development

JEL CLASSIFICATION

E64, H31

DOI: 10.1111/asej.12331

© 2024 East Asian Economic Association and John Wiley & Sons Australia, Ltd.

Received: 22 October 2021; Accepted: 29 May 2024

202 Asian Econ. J. 2024;38:202–231.

wileyonlinelibrary.com/journal/asej

1|INTRODUCTION

In the past 40 years of reform and opening up, China ’s economic growth has

made remarkable achievements. However, excessive reliance on investment and

foreign trade resulting in deficient consumption of residents have become one of

the main problems hindering sustained economic growth. Especially since the

European debt crisis and the US subprime mortgage crisis in 2008, China’s for-

eign trade exports have been greatly negatively impacted (He & Shi, 2014), and

business enterprises have switched from focusing on export to domestic demand,

which further aggravates the contradiction between supply and demand. In this

context, the Chinese government has issued a series of fiscal and monetary poli-

cies to stimulate the economy, which has achieved remarkable results. At the

same time, it has also brought a series of problems. The nation’s proportions of

government debt and enterprise debt to GDP are at the highest level among the

major countries in the world, which may bring systemic financial risks. In this

context, a loose credit policy to promote real estate de-inventory, increase the

debt leverage of the household sector, and reduce the debt of nonfinancial enter-

prises and local government departments becomes a feasible scheme to reduce

systemic risk in China. Under such a relatively loose credit policy, the asset price

of real estate rose rapidly from 2008 to 2018, and the leverage of nonfinancial

enterprises such as real estate was reduced. However, the leverage of the house-

hold sector rose rapidly, already at a relatively high level both from the value of

its leverage ratio and the increasing speed of its leverage ratio (Niu &

Zhen, 2016). This process has brought about two changes in household debt

(see Figure 1): (1) the debt level of China’s household sector has been increasing

and is now at a high level. Household debt as a proportion of disposable income

jumped sharply, and the debt burden of the household sector is at a higher level

than in comparable countries. It is already equivalent to that of developed coun-

tries (such as France, Germany, etc.), whose disposable income is five times that

of China. (2) The marginal change of household sector debt in China is large,

and it is climbing too fast. In 2008, China’s household sector leverage ratio was

less than 20%. However, by the end of 2016, the household sector leverage has

exceeded 40%. China’s family sector leverage doubled in just 7 years (Niu &

Zhen, 2016). Although increase of household debt is conducive to alleviating the

default risk of local government debt and nonfinancial enterprise debt, it may

have a negative impact on household consumption and cause economic fluctua-

tions, which do harm to the sustainability of the Chinese economy and social

development. The past 40 years of global economic development show that the

increase of debt has led to the rapid reduction of household consumption and to

an economic recession (Hansen & Torstensen, 2016).

At present, there is a great deal of literature on the debt problems of finan-

cial institutions and nonfinancial institutions (Hamada & Harada, 2004;

Hamada & Horiuchi, 2004; Harada & Iwata, 2002; Horioka, 2004; Iwata &

ASIAN ECONOMIC JOURNAL 203