BEIJING • Chinese household debt has risen at an alarming pace as property values soared, analysts say, raising the risk that a real- estate downturn could send shockwaves through the world's second-largest economy.

Loose credit and changing habits have transformed the country's famously loan-averse consumers into enthusiastic borrowers.

Skyrocketing real estate prices in major Chinese cities in recent years have seen families' wealth surge. But, at the same time, they have fuelled a historic boom in mortgage lending, as buyers race to get on the property ladder, or invest to profit from the phenomenon.

Now the debt owed by Chinese households has surged from 28 per cent of GDP to more than 40 per cent in the past five years.

"The notion that Chinese people do not like to borrow is clearly outdated," said Mr Chen Long of Gavekal Dragonomics.

The share of household loans to overall lending hit 67.5 per cent in the third quarter of the year, more than twice the share of the year before. But this surge has raised fears that a sharp drop in property prices would cause many new loans to go bad, causing a domino effect on interest rates, exchange rates and commodity prices that "could turn out to be a global macro event", ANZ analysts said in a recent note.

While China's household debt ratio is still lower than in advanced countries such as the United States (nearly 80 per cent of GDP) and Japan (more than 60 per cent), it has already exceeded that of emerging markets Brazil and India. If it keeps growing at its current pace, it will hit 70 per cent of GDP in a few years.

The ruling Communist Party has set a target of 6.5 to 7 per cent economic growth for next year, and the country is on track to hit it, thanks to a property frenzy in major cities and a flood of easy credit.

But keeping loans flowing at such a pace creates such "substantial risks" that it could be a "self-defeating strategy", Mr Chen said.

China's total debt - including housing, financial and government sector debt - hit 168.48 trillion yuan (S$34.8 trillion) at the end of last year, equivalent to 249 per cent of national GDP, according to estimates by the Chinese Academy of Social Sciences, a top government think-tank.

China is seeking to restructure its economy to make the spending power of its nearly 1.4 billion people a key driver for growth, instead of massive government investment and cheap exports. But the transition is proving painful as growth rates sit at 25-year lows and key indicators continue to come in below par, weighing on the global outlook.

The authorities, desperate to keep GDP growth steady, have turned to consumers as a source of finance because "many of the sources of capital through the banks and corporations are essentially used up", said Mr Andrew Collier of Orient Capital Research.

Individuals have turned to pawnshops, peer-to-peer networks and other informal lenders to borrow cash against assets such as cars, art or housing to spend it on consumption, he said.

Banks are also driving the phenomenon, said Mr Andrew Polk of Medley Global Advisors. "Banks have been pushing people to buy houses because they need to make loans," he said, as corporate borrowing has dried up.

Combined with a rise in peer-to- peer lending, with over 550 billion yuan borrowed in the third quarter of the year, the risks of speculative investment have risen, S&P Global Ratings said.

Some analysts argue that China is well positioned to manage these risks. It has plenty of room to take on more leverage as families still save twice as much as they borrow, with some 58 trillion yuan in household deposits, said Oxford Economics.

AGENCE FRANCE-PRESSE