Since the coronavirus outbreak, defaults by Chinese borrowers are at a record-high. This highlights the severity of China’s economic crisis and the challenges to full recovery.
Local courts report that 8.54mn people are on the blacklist of authorities, with most between 18 and 59 years old. They have missed payments for everything from business loans to home mortgages.
This figure represents about 1 percent of Chinese adults working age. At the start of 2020, there were 5.7 million people who defaulted on their debts due to the impact of the pandemic and other restrictions, which caused a slowdown in economic growth and reduced household incomes.
It will be difficult to boost consumer confidence in China. This is the second-largest economy in the world and an important source of global demand. The soaring number of defaulters also highlights the lack of bankruptcy laws in the country, which could help to soften the social and financial impact of the soaring debt.
According to Chinese law, defaulters on the blacklist are barred from engaging in a variety of economic activities. This includes purchasing airline tickets and paying through mobile apps like Alipay and WeChat Pay. This is another setback for an economy that is already facing challenges due to a decline in the property market and weak consumer confidence. Blacklisting is initiated when a borrower has been sued by creditors such as banks and then missed a payment deadline.
Dan Wang, Hang Seng Bank China’s chief economist, said that the rapid increase in defaulters was a result of both cyclical and structural problems. “The situation could get worse before getting better.”
Chinese consumers went on a borrowing binge that led to the personal debt crisis. According to the National Institution for Finance and Development in Beijing, household debt as a percent of the gross domestic product has almost doubled during the last decade, reaching 64 percent in September.
In the face of economic turmoil, wage growth has stagnated or even turned negative.
Many Chinese consumers are struggling to pay their bills. Youth unemployment in China reached a record high of 21,3% in June. The authorities stopped reporting this data.
John Wang, an office worker in Shanghai who was laid off last May, said: “I’ll pay my Rmb28,000 (about $4,000) credit card debt when I get a job.” “I don’t know when it will happen.”
The number of overdue credit card payments in China Merchants Bank increased by 26% in 2022 compared to the previous year.China Index Academy reported that in the first nine month of 2023 there were 584,000 foreclosures across China. This is up by almost a third compared to a year ago.
Blacklisted borrowers may find it difficult to navigate the dozens of restrictions imposed by the state. Defaulters, their families and even the toll road can be barred.
Jane Zhang, the owner of a advertising company in Jiangxi Province in south-east China, who defaulted on her bank loan in May, panicked after a local court prohibited her from using WeChatPay to purchase meals for her toddler.
Zhang said, “I was worried that my son would starve because I had no cash and all of my purchases were done through WeChat.” She later convinced the court to lift the ban on mobile payments while maintaining other penalties.
Legal experts suggest implementing personal bankruptcy laws to help individuals who are unable to repay their debts due to the increasing number of defaults.
“We must find a way to help individuals defaulters to rise again,” said Liu Junhai. He is a professor of law at Renmin University and helped draft China’s bankruptcy law.
A lack of transparency in personal finances makes it difficult to implement such measures. Government officials and interest groups fear that these rules could expose corruption, so policymakers have made little progress in passing regulations on individual asset disclosures.
Many blacklisted borrowers, with little hope for relief, have given up trying to restore their financial health. Zhang closed her advertising agency after losing contracts with local government departments that are prohibited from working for blacklisted firms.
She said, “The court told me that my life would return to normal once I paid off the debt.” “But how do I earn money with so many restrictions?”