China’s Crackdown on Defaulting Debtors: Impact on Economy and Citizens

2024-04-17 11:57:46
People walk at a subway station during the morning rush hour in Beijing, China, on April 11, 2024. (Reuters)

China is stepping up penalties against defaulting debtors, depriving them of essential services such as access to high-speed trains and upscale hotels, in a bid to punish those who fail to meet their financial obligations. These measures are presented in a context where the country faces a growing personal debt that exceeds 11 trillion dollars, a significant figure in a nation where income is considerably low.

The situation of Qin Huangsheng, a factory worker who now deals with a debt of 40,000 dollars (USD) with a base salary of 400 dollars per month, illustrates the harsh reality of many Chinese who, as a result of this policy, are forced to use slower means of transportation and face consumption and mobility restrictions. According to The Wall Street Journal, the number of people included on the government’s blacklist for bad debts has increased by 50% since the end of 2019, reaching 8.3 million.

The author of the article expresses what is repeated daily by millions of Chinese: “On the slow and old trains in which he has to travel, Qin sometimes looks at the other passengers and thinks: ‘I wonder if they are all bad debtors like I'”.

The Chinese regime justifies these actions by pointing out that they are measures aimed only at those who, having the capacity, choose not to pay their debts. However, China’s lack of a personal bankruptcy system, which would allow individuals to restructure or eliminate unsustainable debts, has been criticized by academics who argue that it harms equity and restricts opportunities for financial recovery for citizens.

The economic consequences of accumulating personal debt are extensive. Investment in consumption is being overshadowed by the need to cover debts, which has a direct impact on the country’s economic growth. Despite a 4.7% rise in retail sales of consumer goods during the first quarter, this increase falls short of overall economic growth of 5.3%, reflecting a conservative trend in household spending driven by fear to penalties for late payment.

File image of a man walking past a skyscraper construction site in Beijing’s central business district in February (Reuters)

Western companies such as Apple, Estée Lauder and General Motors have reported a decline in sales in China, indicating the direct impact of financial pressure on consumption. This scenario is forcing the government to focus on boosting manufacturing and exports as a means to sustain the economy, increasing trade tensions with the West.

A black market has emerged to circumvent the restrictions imposed on delinquent debtors, showing the extent of the problem and the creativity of citizens to counteract limitations on mobility and access to basic services. The arrest of a debtor who was trying to evade these restrictions reveals the seriousness with which these measures are applied, according to the article written by journalist Brian Spegele.

Experts, such as Li Shuguang, highlight the urgency of implementing a personal bankruptcy system in China, arguing that this mechanism would promote a more equitable redistribution of wealth by forcing creditors and debtors to share losses arising from bad loans.

The rise in personal debt is largely linked to the country’s real estate boom and the increase in the use of credit cards and personal lines of credit to cover expenses in the face of an economy that shows signs of stagnation. Although the possibility of a US-style financial crisis seems distant, due to state control of the banking system, the prevalence of excessive personal debt represents a considerable challenge for the Chinese leadership.

For people like Qin, easy access to credit backfired. Despite her attempts to resolve her debts and maintain a modest lifestyle, the inability to declare bankruptcy leaves her in a precarious situation, forcing her to seek creative alternatives for her financial survival.

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