Chinese Economic Crisis Deepens As Debt Defaults Reach Record High

The defaults by Chinese borrowers have surged to an unprecedented high since the emergence of the COVID-19 pandemic, underscoring the severity of the nation's economic slump and the challenges hindering a full recovery.

According to local courts, around 8.54 million people, predominantly aged between 18 and 59, have been officially blacklisted by authorities for defaulting on payments ranging from home mortgages to business loans.

The number, which represents roughly 1 per cent of Chinese adults in the working-age group, has risen from 5.7 million defaulters at the start of 2020. This increase is attributed to the economic slowdown and the severe impact on household incomes caused by pandemic lockdowns and other related restrictions.

The escalating count of defaulters is set to exacerbate the challenge of bolstering consumer confidence in China, which is the world's second biggest economy and a vital driver of worldwide demand.

This situation also highlights the absence of personal bankruptcy laws in the country, which could potentially mitigate the financial and societal consequences of soaring debt.

Under Chinese law, defaulters who are blacklisted face restrictions on various economic activities. They are prohibited from buying airplane tickets and using mobile payment apps like Alipay and WeChat Pay.

This represents an additional burden on an economy already struggling with a sluggish property sector and dwindling consumer confidence.

The process of blacklisting commences when a borrower is taken to court by creditors, like banks, and subsequently fails to meet a subsequent payment deadline.

Dan Wang, the chief economist at Hang Seng Bank China, was quoted by Financial Times as saying that the escalating number of defaulters is not just due to cyclical issues but also structural problems. He further warned that conditions might deteriorate before they see any improvement.

The surge in personal debt is a result of Chinese consumers' excessive borrowing. Data from the Beijing-based think-tank, the National Institution for Finance and Development, reveals that household debt relative to gross domestic product has nearly doubled in the last ten years, reaching 64 per cent in September.

However, escalating financial obligations have turned increasingly unmanageable due to stagnation or decline in wage growth amidst the economic slump.

An increasing number of Chinese consumers facing financial difficulties have been unable to pay their bills. Alongside this, a surge in joblessness has been observed, particularly among the youth, with unemployment reaching an unprecedented 21.3 per cent in June. This has led to the authorities ceasing to disclose such data.

This month, China Merchants Bank reported a 26 per cent rise in bad loans from credit card payments overdue by 90 days compared to the previous year. Meanwhile, Shanghai-based consultancy, China Index Academy, noted an almost one-third increase in foreclosures in China during the first nine months of 2023, with the figure reaching 584,000, up from the same period a year earlier.

Navigating through numerous state-imposed limitations can be challenging for borrowers who have been blacklisted. Not only are they and their families often excluded from government employment, but they may also be banned from using toll roads.

Jane Zhang, a businesswoman who owns an advertising company in the south-eastern Jiangxi province and defaulted on a bank loan, expressed her panic when she was prohibited from using WeChat Pay to purchase meals for her young child by a local court in May.

With the rise in defaults, legal experts have suggested implementing personal bankruptcy laws that include debt relief for individual insolvencies.

“We need to figure out a way to help individual defaulters rise up again,” Liu Junhai, a law professor at Renmin University who helped draft China’s corporate bankruptcy law, was quoted as saying by FT.

The absence of clarity regarding personal finances has posed challenges to the implementation of such measures. The advancement of rules concerning individual asset disclosures has been minimal amongst policymakers, primarily due to resistance from government officials and various interest groups who are apprehensive that these regulations might expose corruption.

Many borrowers who have been blacklisted have abandoned their efforts to regain financial stability due to the lack of viable solutions. Zhang, for instance, was compelled to shut down her advertising firm after losing contracts from local government departments, as they are prohibited from collaborating with blacklisted businesses.