The Truth About The Growth of Household Finance in China
Since the dawn of Chinese civilization, the family has been the utmost important unit of society and it still is today. As the most populous country on earth, markets and industries targeting individuals and their preferences is nothing new. But in a country with 442 million families and more to come, it is a surprise that businesses specifically targeting the family unit in China are quite scarce. In this blog we’ll talk about household finance in China, how households invest their money and predictions for the future.
For your reference much of this data was obtained from the China Household Finance Survey, however I’ve also included several reference at the end of the article that were used in the creation of this article.
According to national statistics, the number of Chinese families is on the rise. By 2020 the number should reach 452 million with a steady 1% growth per year. Furthermore, the estimated average family financial assets stand at 319 thousand yuan in 2017, totaling around 14 billion yuan. This number is believed to increase by 2020 to 14.5 billion.
Not only are households in China gaining more wealth but their ability to spend and invest is increasing as well. Chinese household finance has changed significantly in terms of how they invest. In 2011, the average Chinese household’s investable assets were around 170 thousand yuan, but was expected to reach 450 thousand yuan on average by the end of 2018.
Despite the numbers growing and Chinese society changing rapidly, it seems that spending habits have not kept pace. Let’s dig deeper into the composition of the average Chinese household’s assets. Savings still make up a whopping 45.8% of assets and an additional 15.2% remains in pension funds. With millions of families sitting on vast amounts of wealth, household finance in China presents immeasurable opportunities to those willing to tackle the market.
In the following, we will share more information for you to have better knowledge of the household finance situation in China.
Household Finance in China: What are they buying?
Demand for household financial products is spreading like a wildfire in China. Not only is it a trend in First tier or First tier-plus cities, but also in second and third tier cities, like Fuzhou, Foshan and Harbin, too. According to statistics, first tier and first tier-plus cities continue to make up a large portion of the household finance market in China, making up 56% of the customer base in insurance, investment and related products. However, greater potential is being discovered in lower tier cities, which now make up 18.9 and 11.8 percent for second and third tier cities respectively.
It is widely believed that as education becomes more popular and a wider and younger Chinese population begins to graduate from universities demand will continue to increase. Along with greater economic development, the demand for household financial products in China will only increase in non-First tier cities. These new households with upper-middle purchasing power will be interested in investment and insurance products while low purchasing power households will become more interested in digital loan platforms for more efficient borrowing and spending.
If we break down household spending on financial products, we can see that Chinese households are most interested in investing into banking financial products and money market funds, making up nearly 30% of total spending each. Internet financial products are also becoming more popular, making up approximately 23% of the market, 6 times as much as in 2013 due to its efficiency, profitability, and ease of use.
Household Finance In China: Investor Behavior, When and what do households want from their financial products?
Household investment behavior in China can be broken down into 4 different stages:
The Preparation phase
This phase consists of working young professionals who are financially independent and planning to form a family. In this group, they tend to spend more on purchasing property, property renovation, purchasing a car or even wedding expenses. Even though a considerable number of young professionals ask their family for financial help, more and more would like to rely on their own abilities. Under such a premise, household consumer finance services see the highest demand, followed by internet loan services.
The Building Phase
This phase usually is made up of families with children, where household finance no longer concerns just the husband and wife. New focuses on spending emerge mainly targeting the children or the household as a whole. This leads to family expenses growing and, in this stage,, digital investment products are the most popular followed by insurance and strategic investment products. Households in this stage are more prone to invest in financial products that are secure and provide higher levels of privacy.
The Developing Phase
Anxiety towards increased spending begins to rise at this stage as the children go to school and the husband and wife begin to age. Willingness to spend is the highest at this stage but families also begin to look for stronger returns on their investments. Analysis shows that internet loan and e-investment are among the most popular financial services to households in China during this stage. Furthermore, families prefer to invest with well-known and trusted platforms as families feel more confident with their services.
The Sustaining Phase
Each family members’ has matured, careers are stable and there is less to be worried about. Security and privacy continue to be the most concerning factors related to household finance during this stage. Households will still prefer big brands, however, user-friendliness becomes a more important factor among these users during this stage.
Household Finance in China: The SHE Factor, not to be ignored
Another survey shows that, although although men remain the primary breadwinners of the family, in most modern families in China, the power to allocate financial resources in a household lies on the female! The survey shows that 62% of families have the wife controlling finances, determining spending and investing.
The reason for this phenomenon is a cultural one but also a practical one, while most men are out working and providing for the family, the female might quit their job and focus on taking care of the children and the household.
Despite their control over the family’s finances, the family finance market doesn’t seem to favor women. Figures shown that, 55% of women are not satisfied with the male-oriented family finance market, where products are usually targeted to men.
The differences between the sexes cannot be ignored especially in a market as big as China’s. Not only now is the market tilted towards males but also, studies on the differences between the two sexes’ purchasing behavior for financial products are scarce.
More research is needed for one to tap into the family finance market while keeping the ‘She’ factor in mind!
Household Finance in China: What holds for the future?
Chinese Household Debt is on the Rise:
Traditionally known as a nation of “savers” household debt has been on the rise. Household debt is largely being fueled by online lending platforms, which have made credit easier to access for those unable to obtain it through the traditional financial system.
Inclusive of mortgage lending household debt reached 35.6 trillion yuan as of August 2018. This equates to nearly double the ratio of household debt to GDP when last measured in 2011. This rise in debt has been most attributed to the rise in consumer lending. Whereas obtaining credit used to be incredibly difficult for consumers and China more and more businesses are entering the industry due to increasing demand.
The strangest component to this rise in household debt is that the growth in retail has hit a 15 year low of 9.4% in 2017. As of now it’s unclear where exactly the funds are being spent that are obtained through consumer loans, however there are a few possibilities. Many believe that borrowers are investing the funds into financial products and equities, but the bulk seems to be linked to the housing market.
In 2017 down payments on houses increased by a whopping 70% to 8.34 trillion yuan according to Fujian-based brokerage, Industrial Securities. At the same time consumer borrowing quadrupled to 3.4 trillion yuan.
While, it’s not certain that these two figures are related it’s likely given the investment habits and the importance of property to the average Chinese household that this would explain the explosion in household debt. For more detail on the growth of household debt in China, you can check on Han Wei’s article on CaixinGlobal.
For more on the Chinese attitude toward real estate investment check out the blog below:
Understanding Chinese Growing Investment into Foreign Real Estate
A Smaller Tax Burden
The Chinese government released a plan for personal income tax cuts on October 20, 2018 that would go into effect as of January 1st 2019. The plan included a range of new deductions that taxpayers could take advantage of. These deductions can be claimed for a wide range of expenses, which include education, family support, rent, medical care, and mortgages.
This lower tax burden is expected to relieve some stress for burdened Chinese households and free up incomes to drive consumption. This was preceded by an increase to the minimum threshold for paying personal income tax earlier in the year to 5,000 yuan per month.
Where the this excess income from Chinese taxpayers reduced tax burden will be allocated is yet to be determined. If all goes to the Chinese government’s plan, we’ll hopefully see an increase in consumption in 2019. However, given the uncertainty caused by the trade war and other headwinds facing the Chinese economy, Chinese consumers may choose to save or invest their excess funds.
Chinese Consumer Confidence Remains High
Although Chinese consumer confidence took a slight dip during Q2 in 2018, it’s risen again to near its all time high as of November 2018, according to the National Bureau of Statistics of China. With obstacles facing the Chinese economy ahead, it seems like consumers remain confident in the government’s ability to handle them & the overall state of the economy.
Consumer confidence plays an important role for household finance in China. With the government introducing incentives to further drive consumption, we’ll likely see households begin to spend more in 2019. With increased spending comes a need for greater liquidity, meaning there could be a dip in longer term investment products.
However, the Chinese government has made many attempts to incentivize consumption and reduce household savings with little success. Let’s see if this changes in 2019.
Overall it seems like household finance in China will continue to be a topic to watch, not only for its opportunities but for its relation to the overall health of the Chinese economy. We’ll be keeping a close eye on this sector as we head into 2019!
Interested in entering the Chinese market or have any questions? Get in touch!
As Consumer Credit Surges, Analysts Ask: Where’s the Spending Boom? By Wu Hongyuran, Han Yi and Fran Wang
In Depth: China’s New Household-Debt Fears By Wu Hongyuran, Wu Xiaomeng, Hu Yue and Han Wei
China’s banking watchdogs set sights on rising household debt problem