Over-leveraged? Foundation’s wobbly?

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Malaysians used to save a lot. I say used to because even for Gen-X like me, I am also struggling to save and stop myself from buying 7 new long sleeve shirts this 2018 Chinese New Year. Let me explain. From 73kg, just a year ago, I am back to 80kg today. It meant that all my M-sized long sleeve shirts I have could no longer be worn and L-sized ones would make me look better. I do have L-sized ones but there were from 2016. I can’t be wearing those every day. At least 7 new long sleeve shirts meant that I have some extra ones to mix and match for 2018. All seven was bought at discounts yeah and the total prices for these 7 is lower than RM500. I can wear them for years which meant value for money. Next year, I will go back to just 2 like 2016, 2015. High savings rate would form a natural financial defence for countries. It seems that this defence line is getting weaker by the year.

My parents, even though both were civil servants could save a lot! If they did not, it would have been hard for me to have graduated from Bristol, UK. What about the current generation? They are called the Millenials. I think they can also be known as the ‘spending’ generation because they are used to spending. I tried but could not find the latest savings rate for Malaysians. If anyone has this info, please share yeah. However, I found out that this is true even for China and that this will bean Achilles’s heel in the future if not remedied. Here’s that full article in TheStar. 

It says that for years, economists and policymakers have hailed the propensity of Chinese to save. This meant that China has low household debts and this is main reason why financial crash will not happen in China. Over the past two weeks however, the banking regulators sound especially concerned because some latest data showed that Chinese households borrowed 910 billion renminbi ($143 billion) in January — nearly a third of all RMB-denominated bank loans extended that month. Between January and October last year, according to recent data from Southwestern University of Finance and Economics, Chinese household leverage rose more than eight percentage points, from 44.8 percent to 53.2 percent of GDP — a record increase. Before 2009, the household debt levels were only at around 18 percent of GDP for five years. Besides that, younger, urban Chinese are proving more willing to bring their consumption forward to today rather than pushing it off to the future as their parents did. (VERY TRUE). Of course, one other reason is because of the skyrocketing home prices. In conclusion, it says that once households start borrowing and spending more, the pool of cash to finance investment dries up. This will cause banks to lose their most potent firefighting tool: a stable funding base. The full article by Bloomberg in TheStar here. 

Learnt anything? Yea, struggle as we may, savings would help us in future. Assuming prices suddenly drop due to a correction, only those with lots of savings would be able to take immediate action. If we need to borrow, it’s already too late. Secondly, we must watch the household debts and look at it versus the assets. It should be much smaller than asset for the market to be still safe. Oh yeah, please do not overstretch because when the Bank Negara Malaysia felt that people are simply borrowing too much, they will increase the OvernightPolicy Rate further and this will affect weaker borrowers. Stay on the safe side when we save more. Happy saving.

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written on 20 Feb 2018

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