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A debt crisis to the tune of trillions has affected the livelihoods of many Chinese nationals as they scramble to pay their debts. Beijing, on the other hand, is punishing defaulters in questionable ways
 "How China is punishing people who can’t repay debts")
Household debt in China has surged by 50% in the past five years to around $11 trillion today. Image used for representational purposes/AP
On Tuesday (April 16), China released data showing that its economy had grown far more than expected in the first quarter of 2024. While this is a reason for Beijing to smile, personal debt is a reason to worry.
It’s a growing burden and Chinese authorities realise this. They have stringent measures to crack down on delinquent debtors.
If you have personal debt, you become an outcast of sorts. You are put on a government blacklist, which is ever-growing: The number of people on it has jumped by close to 50 per cent since last 2019 to 8.3 million today, according to a report in The Wall Street Journal (WSJ). This is about one per cent of the country’s working-age adults.
We take a look at how China is unforgiving towards those with personal debt.
Punishing people with debt
Unlike the United States, China does not permit individuals, even those who have a streak of misfortune, to file for bankruptcy to write off their debts and start afresh. What it does instead is penalise them.
Chinese authorities blacklist debtors, making it impossible for them to go about their everyday business. They cannot use toll roads, purchase online tickets or use electronic payment apps like Alipay and WeChat. Many stores in China do not accept cash payments making it difficult for defaulters to buy essentials like food, says a report in Voice of America (VoA).
Individuals are restricted from using high-speed rail and air travel; they cannot purchase costly insurance plans or enjoy leisure activities such as vacations and stays in upscale hotels. Failure to adhere to these restrictions can result in detention by authorities, reports WSJ.
The blacklisted Chinese have difficulty getting more loans and some are even banned from working as civil servants. In case of unpaid debts, authorities seize a person’s income to cover the liabilities, leaving them with a meagre allowance to meet their daily expenses. Despite attempts to seek relief through legal channels, such as petitioning for increased allowances, debtors often face unfavourable outcomes.
The Chinese government had earlier said that it only targets those who can repay debts but refuse to do so. But that appears far from the truth. The country’s indebted population continues to grow as the economy faces challenges and unemployment is a concern.
China’s personal debt burden
People across the country are heavily burdened with debt. According to a report in The Financial Times, there were 5.7 million defaulters in 2020. In four years, that number has soared to 8.3 million. That is a staggering increase of 46 per cent.
Household debt has surged by 50 per cent in the past five years to around $11 trillion today.
China’s prolonged housing boom significantly contributed to the surge in personal debts, as individuals borrowed extensively to buy homes. Some buyers even accrued additional debt to invest in multiple properties, often leaving them vacant. With the housing market downturn and falling prices, many find themselves burdened with unmanageable debts.
Foreclosed homes listed for sale surged by 43 per cent in 2023, reaching approximately 400,000 properties, according to the China Index Academy. It’s not just housing loans that have led to rising debt levels. Increased reliance on credit cards and personal credit lines to cover expenses amid economic stagnation has also led to higher indebtedness.
The Bank of China reported in September last year that overdue unpaid credit in the first half of 2023 totalled RMB 89.646 billion yuan (approximately $12.3 billion), an increase of 3.54 per cent compared to 2022, reports VoA.
According to Li Zhaobo, an honorary research fellow at the Asia-Pacific Institute of Business at the Chinese University of Hong Kong, another reason for high debt is that many mainland Chinese people, whose consumption has grown faster than their salaries, do not understand the risks and costs of borrowing. “While Hong Kong people know that they can choose low-interest loans, mainlanders are not familiar with the idea… So once they have cash flow difficulties, they can’t pay off their debts with interest,” he told VOA Mandarin last December.
The fallout
In China, leaders are keen that people spend more, as it would provide an impetus to the economy. However, the fear of not being able to pay off their debts is making consumers cautious.
Retail sales of consumer goods in China rose 4.7 per cent on year in the first quarter, the government said Tuesday, lagging behind total economic growth of 5.3 per cent, reports WSJ.
The financial strain on Chinese consumers has led to weaker sales for Western companies operating in the country including tech giants like Apple and automotive manufacturers like General Motors.
Many individuals face significant challenges in managing their debt and navigating systemic hurdles and restrictions imposed by the government. Despite efforts to repay debts, debtors often find themselves trapped in a cycle of financial strain and uncertainty. It’s a vicious cycle.
The way forward
Scholars and experts advocate for a nationwide personal bankruptcy system to address China’s debt crisis and promote economic equity. “A personal-bankruptcy system is a mechanism for the redistribution of wealth,” Li Shuguang, a scholar who has advised the government on bankruptcy policy, wrote in a Chinese magazine commentary online last summer, according to WSJ.
However, in China that is easier said than done.
With inputs from agencies
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English (US) ·