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Defaults by Chinese borrowers have risen to a record high since the outbreak of the coronavirus pandemic, highlighting the extent of the country's economic downturn and the obstacles to a full recovery.
According to local courts, a total of 8.54 million people, most of them between the ages of 18 and 59, are officially blacklisted by authorities for missing payments on everything from home mortgages to business loans.
That figure, representing about 1 percent of Chinese working-age adults, has risen from the 5.7 million defaulters at the start of 2020 as pandemic lockdowns and other restrictions hampered economic growth and reduced household incomes.
The rising number of defaults will make it even more difficult to boost consumer confidence in China, the world's second-largest economy and a crucial source of global demand. It also highlights the country's lack of personal bankruptcy laws that could mitigate the financial and social impact of rising debt.
Under Chinese law, blacklisted defaulters are barred from a range of economic activities, including buying airline tickets and paying through mobile apps such as Alipay and WeChat Pay. The blacklisting process is triggered when a borrower is sued by creditors, such as banks, and subsequently misses a subsequent payment deadline.
“The rapid rise in defaults is a product of not only cyclical issues but also structural issues,” said Dan Wang, chief economist at Hang Seng Bank China. “The situation may get worse before it gets better.”
The private debt crisis is the result of credit usury by Chinese consumers. According to the National Institution for Finance and Development, a Beijing-based think tank, household debt as a percentage of gross domestic product has nearly doubled over the past decade, reaching 64 percent in September.
But mounting financial obligations have become increasingly unmanageable as wage growth has stalled or even turned negative amid the economic malaise.
As a growing number of cash-strapped Chinese consumers struggle to make ends meet, many have defaulted on their bills. More Chinese residents are also struggling to find work: Youth unemployment hit a record 21.3 percent in June, prompting authorities to stop reporting the data.
“I will pay off my credit card balance of 28,000 RMB (US$4,000) when I get a job,” said John Wang, a Shanghai-based office worker who fell behind on payments after being fired in May. “I don’t know when that will happen.”
China Merchants Bank said this month that bad loans from credit card payments that were 90 days past due rose 26 percent in 2022 compared to a year ago. China Index Academy, a Shanghai-based consulting firm, reported 584,000 foreclosures in China in the first nine months of 2023, up nearly a third from a year earlier.
Life for blacklisted borrowers can be difficult as they have to overcome dozens of government-imposed restrictions. Defaulters and their families are barred from government jobs and may even be banned from using toll roads.
Jane Zhang, the owner of an advertising company in the southeastern province of Jiangxi who defaulted on a bank loan, said she panicked when a local court banned her from using WeChat Pay to buy meals for her toddler in May.
“I thought my son would starve since I had no cash on hand and all my daily purchases were made via WeChat,” said Zhang, who later persuaded the court to lift the ban on mobile payments and keep other penalties in place.
As the number of defaults increases, legal experts have suggested introducing a personal bankruptcy law with debt relief for individual bankruptcies.
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“We need to find a way to help individual debtors rise again,” said Liu Junhai, a law professor at Renmin University who helped draft China's corporate bankruptcy law.
However, the lack of transparency in personal finances makes it difficult to implement such measures. Policymakers have made little progress in adopting individual asset disclosure rules due to backlash from government officials and other stakeholders who fear the rules could expose corruption.
Many blacklisted borrowers have little hope for relief and have given up on restoring their financial health. Zhang decided to close her advertising business after losing accounts from local government agencies, which are banned from working with blacklisted companies.
“The court said my life would go back to normal if I paid the debt,” she said. “But how can I make money when I face so many restrictions?”
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