Chinese borrowers default

Chinese borrowers default in record numbers as economic crisis deepens

More than 8mn people blacklisted by authorities after missed payments on mortgages and business loans

Under Chinese law, defaulters are blocked from a range of economic activities, such as purchasing aeroplane tickets and making mobile phone payments, representing a drag on the economy

Defaults by Chinese borrowers have surged to a record high since the outbreak of the coronavirus pandemic, highlighting the depth of the country's economic downturn and the obstacles to a full

recovery.

A total of 8.54mn people, most of them between the ages of 18 and 59, are officially blacklisted by authorities after missing payments on everything from home mortgages to business loans, according to local courts.

That figure, equivalent to about 1 per cent of working-age Chinese adults, is up from 5.7mn defaulters in early 2020, as pandemic lockdowns and other restrictions hobbled economic growth and gutted household incomes.

The soaring number of defaulters will add to the difficulty of shoring up consumer confidence in China, the world's second largest economy and a crucial source of global demand. It also throws a spotlight on the country's lack of personal bankruptcy laws that might soften the financial and social impact of soaring debt.

Under Chinese law, blacklisted defaulters are blocked from a range of economic activities, including purchasing aeroplane tickets and making payments through mobile apps such as Alipay and WeChat Pay, representing a further drag on an economy plagued by a property sector slowdown and lagging consumer confidence. The blacklisting process is triggered after a borrower is sued by creditors, such as banks, and then misses a subsequent payment deadline.

"The runaway increase in defaulters is a product of not only cyclical but also structural problems," said

Dan Wang, chief economist at Hang Seng Bank China. "The situation may get worse before it gets better."

The personal debt crisis follows a borrowing spree by Chinese consumers. Household debt as a percentage of gross domestic product almost doubled over the past decade to 64 per cent in September, according to the National Institution for Finance and Development, a Beijing-based think-tank.

But mounting financial obligations have become increasingly unmanageable as wage growth has stalled or turned negative in the midst of the economic malaise.

As a growing number of cash-strapped Chinese consumers have struggled to make ends meet, many have stopped paying their bills. More Chinese residents are also struggling for work: youth unemployment hit a record 21.3 per cent in June, prompting authorities to stop reporting the data.

"I will pay my Rmb28,000 ($4,000) credit card balance when I have a job," said John Wang, a Shanghai-based office worker who defaulted on his payments after being laid off 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 overdue had increased 26 per cent in 2022 from the year before. China Index Academy, a Shanghai-based consultancy, reported 584,000 foreclosures in China in the first nine months of 2023, up almost a third from a year earlier.

Life for blacklisted borrowers can be difficult as they navigate dozens of state-imposed restrictions.

Defaulters and their families are barred from government jobs, and they can even be prohibited from using toll roads.

Jane Zhang, owner of an advertising company in south-eastern Jiangxi province who defaulted on a bank loan, said she panicked when a local court banned her in May from using WeChat Pay to buy meals for her toddler.

"I thought my son was going to starve since I didn't have any cash at hand and all my daily purchases were made through WeChat," said Zhang, who later persuaded the court to drop the mobile payment ban while keeping other punishments in place.

As defaults climb, legal experts have proposed the introduction of personal bankruptcy laws with debt relief for individual insolvencies.

"We need to figure out a way to help individual defaulters rise up again," said Liu Junhai, a law professor at Renmin University who helped draft China's corporate bankruptcy law.

But a lack of transparency concerning personal finances has made such measures difficult to implement. Policymakers have made little progress in passing regulations on individual asset disclosures due to a backlash from government officials and other interest groups who fear the rules may reveal corruption.

With little hope of relief, many blacklisted borrowers have given up on restoring their financial health. Zhang decided to close her advertising business after losing accounts from local government departments, which are banned from working with blacklisted companies.

"The court said my life will return to normal if I pay off the debt," she said. "But how can I make money when I am facing so many restrictions?"

Source:

FT