The aftermath of the coronavirus pandemic has left China grappling with a historic surge in defaults, underscoring the depth of the country’s economic challenges and the hurdles hindering a complete recovery. As economic woes persist, a record-breaking 8.54 million individuals, predominantly aged between 18 and 59, find themselves officially blacklisted by authorities for failing to meet payment obligations, ranging from home mortgages to business loans, according to local courts.
This staggering figure, equivalent to approximately 1% of China’s working-age adults, marks a significant increase from the 5.7 million defaulters reported in early 2020. The economic fallout from pandemic-related lockdowns and restrictions severely impacted growth and eroded household incomes, contributing to the alarming rise in defaults.
The surge in defaulters poses a formidable challenge to efforts aimed at bolstering consumer confidence in China, a pivotal force in global demand as the world’s second-largest economy. Furthermore, it highlights a critical gap in China’s financial system—the absence of personal bankruptcy laws to mitigate the financial and social repercussions of escalating debt.
Under existing Chinese law, blacklisted defaulters face restrictions on various economic activities, including purchasing plane tickets and conducting transactions through popular mobile apps like Alipay and WeChat Pay. This adds an additional burden to an economy already grappling with a slowdown in the property sector and diminished consumer confidence.
The blacklisting process is triggered when creditors, such as banks, file lawsuits against borrowers who subsequently miss payment deadlines. Dan Wang, Chief Economist at Hang Seng Bank China, noted, “The runaway increase in defaulters is a product of not only cyclical but also structural problems. The situation may get worse before it gets better.”
The personal debt crisis follows a period of extensive borrowing by Chinese consumers, with household debt as a percentage of GDP nearly doubling over the past decade to 64% in September, according to the National Institution for Finance and Development. However, as wage growth stagnated or turned negative amid economic challenges, mounting financial obligations became increasingly untenable.
With a growing number of financially strained Chinese consumers struggling to meet their obligations, a rise in defaults has become apparent. Additionally, the job market faces challenges, with youth unemployment reaching a record 21.3% in June, prompting authorities to cease reporting the data.
As defaults continue to climb, some individuals find themselves navigating numerous state-imposed restrictions. Defaulters and their families may be barred from government jobs, and prohibitions on using toll roads could further complicate their lives.
Amid this financial turmoil, legal experts are advocating for the introduction of personal bankruptcy laws that provide debt relief for individual insolvencies, offering a potential lifeline for those grappling with the economic fallout of the pandemic.
Photo (PHIL ROSEN)
December 4, 2023
By: Delino Gayweh
Serrarri Financial Analyst
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