Cover Story: How to Provide Relief as Personal Debt Piles up in China

Wu Qing, a small garment factory owner in Shandong province, faced a financial crisis as his business deteriorated post-pandemic. He incurred 300,000 yuan in loans for business expansion in 2019, then borrowed another 500,000 yuan through consumer loans and credit cards to sustain his business amidst economic woes. By mid-2023, Wu was struggling with loan repayments amid China's sluggish economic recovery, mirroring the struggles of many others who are burdened by debt. Similarly, Fu Peng, a restaurant owner in Hefei, is overwhelmed with 4 million yuan in loans and struggles to keep up with his nearly 60,000-yuan monthly repayments despite earning between 15,000 and 25,000 yuan monthly [para. 1][para. 2][para. 3][para. 4].

The financial struggles faced by entrepreneurs like Wu and Fu reflect a broader issue in China as individuals suffer from declining incomes and mounting debt levels. This economic downturn has particularly hit those who borrowed heavily during better times when the national economy was booming and easy credit was abundant. Many individuals, caught off guard by unexpected financial strains, now face significant personal debt crises [para. 5][para. 6]. Wu's experience with pervasive debt relief advertisements and debt intermediaries reveals the rise of these services despite the regulatory challenges they bring. These intermediaries offer to renegotiate debts or consolidate high-interest loans yet often operate in gray areas or outright illegal practices, leading regulators to issue warnings[para. 7][para. 8].

Debt restructuring, a well-established practice in developed economies, is gradually gaining traction in China, albeit primarily for corporate clients. Some banks have started exploring risk mitigation measures like extending loan periods or refinancing personal mortgage and business loans. The challenge lies in adapting these strategies for personal borrowers and recognizing “honest but unfortunate” debtors to offer them a chance for financial recovery. The absence of a personal bankruptcy law complicates concerted efforts to address personal debt issues [para. 9][para. 10].

Chinese banks are experiencing rising non-performing loan (NPL) rates, reflected in increasing personal loan defaults. By mid-2024, institutions such as China Construction Bank reported an NPL rise from 0.66% to 0.84%, with notable increases in personal business loans and credit card loans. This trend is echoed across other major banks, highlighting the financial strain on small and micro businesses, many of which are locally owned. The ripple effects of these challenges could have grave economic consequences [para. 11][para. 12][para. 13].

Amid this backdrop, financial institutions are responding by offering debt relief measures like interest and penalty fee reductions. Wu Qing managed to secure a five-year repayment plan at reduced interest, exemplifying how banks are distinguishing between those capable of repayment and those not due to external factors. While these efforts help prevent loans from becoming non-performing, they are not widely publicized to prevent moral hazard concerns [para. 14][para. 15]. The landscape has also fostered a market for debt intermediaries who exploit information gaps and sometimes engage in fraudulent activities, further complicating personal debt resolution efforts [para. 16][para. 17].

The rise of debt intermediaries emphasizes the critical need for regulated debt management agencies, as seen in the U.S. and the U.K., to navigate debt relief efficiently. Some commercial banks in China are beginning to integrate debt restructuring into their operations. Yet, challenges remain due to the lack of a unified regulatory framework for personal debt relief [para. 18][para. 19]. State policy support could facilitate better management of personal debt, especially as China continues to adapt its economic support measures for both small businesses and individual debtors [para. 20][para. 21].