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

By Ding Feng, Liu Ran, Zhang Yuzhe and Han Wei

Wu Qing found himself in an overwhelming predicament as his loan repayments piled up.

The owner of a small garment factory in Shandong province, he had borrowed 300,000 yuan ($41,000) in personal business loans in late 2019 to expand production as his business took off. When the pandemic struck, however, his operations faltered. To keep the factory running, Wu took out an additional 500,000 yuan through consumer loans, credit card advances and online lending, hoping to weather the storm.

Even after the pandemic, Wu’s business struggled to recover due to China’s sluggish economic rebound. With his loans nearing maturity and pressure from past debts and unpaid wages, Wu faced a severe cash crunch.

Similarly, 42-year-old Fu Peng, a restaurant owner in Hefei, is burdened with nearly 4 million yuan in debt, including bank loans, online loans, credit card debt and private loans. Despite earning between 15,000 and 25,000 yuan each month, Fu’s business has slowed, and the nearly 60,000-yuan monthly loan repayments are making it difficult for him to stay afloat.

Small business owners like Wu and Fu are not alone in their financial predicament. As China’s economy slows, many individuals face falling incomes and worsening financial conditions. Those who borrowed heavily in recent years are particularly vulnerable to debt crises. These usually stem from two factors: overspending beyond one’s repayment ability or difficulties in managing personal businesses.

Li Gang, a 30-year-old white-collar worker, saw his life change dramatically in mid-2023 when his employer’s business suffered a downturn, and his salary was halved. To make matters worse, he had invested more than 300,000 yuan of borrowed money into a project now on the brink of collapse, leaving him with significant debt and job insecurity.

A few years ago, when China’s economy was booming, borrowing for consumption and investment was easy. However, many young people, overestimating their income and repayment capacity, are now caught off guard. With dwindling repayment ability — and some suffering losses in stock markets or failed investments — a growing number are facing personal debt crises.

Overwhelmed by debt, Wu began receiving constant calls from debt intermediaries and was bombarded with social media ads promising “debt optimization” and “debt restructuring.” These services claimed to help by negotiating interest-free credit card installments, securing low-interest bank loans to replace high-interest online loans, or offering debt settlements at a 40% discount. Some intermediaries even offered high-interest bridge financing, profiting from steep interest charges.

In the past two years, China has seen a surge in debt intermediaries promoting “personal debt restructuring”, with some engaging in gray-area or even illegal practices. This has led regulators to issue repeated warnings about the risks since 2023. While the rise of these services reflects a growing demand for personal debt solutions, the absence of a personal bankruptcy law and clear regulations, resolving these personal debt remains an uphill battle in China.

The concept of personal debt restructuring is gaining traction. A retail banking executive at a state-owned bank told Caixin that while debt restructuring has traditionally been reserved to corporate clients, typically through adjustments to interest rates, loan terms and repayment schedules, some banks are now introducing risk mitigation measures in the retail sector. These measures include extending loan periods, restructuring debt and even refinancing, particularly for personal mortgages and business loans.

In developed economies like those in Europe and the United States, personal debt restructuring is a common practice, supported by well-established personal bankruptcy systems refined over decades. In contrast, China is still grappling with how to identify “honest but unfortunate” debtors and offer them a chance to rebuild their financial lives.

Personal debt piles up

China’s growing personal debt crisis is increasingly reflected in banks’ balance sheets. Personal loans typically encompass both secured loans, such as mortgages and business loans, and unsecured loans, like credit card and consumer loans. Data from listed banks show rising non-performing loan (NPL) rates for both state-owned and joint-stock banks.

By mid-2024, the personal loan NPL rate at China Construction Bank had climbed to 0.84%, up from 0.66% at the end of 2023. The most significant increases were in personal business loans, which surged from 0.95% to 1.57%, and credit card loans, which rose from 1.66% to 1.86%. Similar trends were reported by other state-owned banks, including the Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China.

Joint-stock banks experienced even more significant increases. For instance, Bohai Bank’s NPL ratio for personal loans rose to 3.30% by mid-2024, marking a 1.05 percentage point rise from the end of 2023.

“Most banks are seeing an increase in non-performing personal loan rates, particularly in mortgages and business loans,” a state bank executive said. Since the pandemic, some upstream companies have delayed payments, creating debt repayment challenges for small and micro businesses downstream in the supply chain.

“Many people are facing financial difficulties not because of personal recklessness, but due to the pandemic’s impact and the broader economic environment,” the executive added. “In many smaller cities, most businesses are locally owned. If these entrepreneurs fail, the economic consequences will be severe.”

Unspoken rules of debt relief

As personal debt defaults continue to rise, financial institutions have begun offering debt relief through interest and penalty fee reductions, as well as restructuring repayment plans.

Wu finally breathed a sigh of relief after negotiating with a joint-stock bank to restructure part of his credit card and business loans, securing a five-year repayment plan with reduced interest.

“The key factor in deciding whether to offer loan extensions, installment plans or interest reductions is the borrower’s repayment willingness — essentially identifying ‘honest but unfortunate’ individuals,” said an internet bank executive. For long-term customers with solid repayment histories, banks are generally willing to provide some relief if circumstances such as illness, personal crises or business setbacks affect their ability to repay.

There are two reasons for this trend. On the one hand, renegotiating repayment terms can help prevent loans becoming non-performing assets. On the other hand, national policies encourage banks to support small and micro enterprises,” according to a state-owned bank executive.

A private bank manager in China’s western region noted that since the pandemic, banks have steadily increased their interest and fee reductions.

However, banks generally avoid publicizing specific policies on interest reductions or debt restructuring. Revealing these could lead to an influx of debtors trying to negotiate favorable conditions, which could introduce moral hazard, according to the internet bank executive.

This lack of transparency has turned these informal negotiation tactics into widely shared strategies on social media, creating opportunities for debt intermediaries to exploit information asymmetry and attract clients.

With more people facing debt crises and formal loan negotiation channels lacking transparency, numerous intermediaries have emerged claiming to be able to resolve “personal debt issues.” While some have provided temporary relief, the sector remains largely unregulated and is riddled with false advertising, overpromises and even fraud.

In 2024, police in Ningxia, in north-central China, exposed a criminal case involving a group that claimed to offer “debt resolution at 25% of the original amount.” The scheme recruited more than 20,000 agents nationwide defrauding 5,000 debtors of more than 200 million yuan.

Several banking professionals told Caixin that illegal debt intermediaries often fabricate documents to deceive debtors or financial institutions, including forging medical records to take advantage of bank policies that offer debt relief for borrowers facing severe illness.

“The purpose of the overdue negotiation mechanism was to offer a special pathway for individuals in severe financial distress, helping them ease their burden and avoid falling deeper into debt,” said an executive from a leading fintech company. However, some unscrupulous legal advisory firms and debt intermediaries have exploited social media platforms to exaggerate the benefits of debt negotiations. By encouraging users to stop repaying and instead negotiate, they disrupt financial order and erode the social credit system.

Banks’ concerns

In developed economies, personal debt restructuring is well-established. Xiao Bing, senior vice president of Wells Fargo’s Small Loan Department, said that for overdue consumer loans like credit card debt, banks in the U.S. typically initiate collection efforts within 90 to 120 days. If these efforts fail, the debt is often sold to collection agencies.

One common strategy for banks is to reduce the outstanding principal on loans, helping borrowers who are financially struggling by offering a more affordable repayment plan. Xiao emphasized that when banks determine that it is more beneficial to recover part of the loan rather than pursue legal action or foreclosure, they may opt for principal reduction.

Xiao compared two scenarios: if a bank has only a 10% chance of recovering the full loan amount but a 60% chance of recovering half, the second option is more advantageous. Not only does it increase the bank’s recovery rate from 10% to 30%, but it also helps the borrower avoid bankruptcy and protects the interests of depositors by recovering more assets.

Chinese banks typically do not agree to reduce or waive the principal on personal loans. Instead, most NPLs are sold in bulk to asset management companies at a significant discount, with the starting price usually at around 5% of the total principal and interest.

According to China Credit Assets Registry & Exchange Co. Ltd., in the fourth quarter of 2024, 443 NPL transfer deals were made, totaling 123.48 billion yuan in outstanding principal and interest — up 49.65% from the third quarter and 56.67% year-on-year. Among the total, 71.54 billion yuan in personal NPLs were transferred, accounting for 72.87% of the total, with 66% being consumer loans, 19.1% business loans and 14.9% credit card overdrafts.

Banks prefer to sell non-performing loan packages at high discount rather than negotiate principal reductions with individual borrowers due to the lack of clear policies, the state bank executive said. They are also concerned about a surge in delinquents and the potential misuse of leniency. Additionally, state-owned banks worry about the perception of state asset loss.

When collection efforts fail, some banks resort to lawsuits. However, a senior executive at a private bank said that cases involving small, scattered loans are often not accepted by courts due to limited judicial resources.

Improving the system

“The unregulated growth of debt intermediaries highlights the growing demand for personal debt restructuring,” said a lawyer specializing in this field. He suggested that China could learn from Britain and the U.S. by incorporating debt management agencies into a regulatory framework, with rules to prevent advance fees, false advertising and excessive marketing.

In the U.S., debt management agencies fall into two main categories. Nonprofit credit counseling agencies help debtors by creating management plans to reduce monthly payments through extended repayment terms or lower interest rates, though they do not negotiate debt reductions. For-profit entities, such as debt settlement or credit repair companies, renegotiate terms with creditors but often charge high fees. Both are regulated by the Federal Trade Commission.

Commercial banks are adapting to the evolving personal debt landscape by incorporating debt restructuring into retail lending business. A credit card manager at a joint-stock bank told Caixin that banks have moved away from their previous reluctance to negotiate with borrowers. Since 2021, during the pandemic, the bank has actively engaged in debt relief negotiations, offering a range of flexible strategies.

But banks still have compliance and accountability concerns when extending or renewing loans for individual borrowers due to the lack of unified regulatory framework, several bank sources told Caixin.

“The state should consider providing policy support for personal debt resolution,” said a joint-stock bank executive. While small business loans already benefit from supportive policies, there are no lenient rules for individual debt, such as credit card arrears.

“Introducing supportive measures would help individual debtors better navigate economic cycles,” said the executive.

Contact reporter Han Wei (weihan@caixin.com)

caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.

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