Chinese financial institutions are facing challenges in adhering to the recent guidelines set by Beijing aimed at enhancing consumer credit. They are currently grappling with a significant increase in defaults on personal loans and are finding it difficult to identify households in stable financial conditions that are interested in borrowing.
Since March, financial regulators have released several directives encouraging banks to provide more affordable loans to stimulate consumption, as part of wider initiatives aimed at mitigating the effects of the trade conflict with the United States.
This led banks to promote personal loans at unprecedented low interest rates of less than 3% at first, before increasing them again due to worries about diminishing profit margins.
Loan managers and bank executives informed Reuters that they are facing challenges in increasing consumer lending, attributing this to weak demand, alongside worries regarding a swiftly escalating amount of bad household debt and uncertainty surrounding their clients’ income levels.
Recent reductions in wages within the financial sector, manufacturing, and public services have adversely affected the financial well-being of households, while increased tariffs in the United States are heightening worries regarding job security and income stability.
“Identifying borrowers for consumer loans is quite challenging,” remarked a branch manager at a state-owned bank, who preferred to remain anonymous because of the delicate nature of the subject. “Financial institutions are in a dilemma, balancing the need to achieve lending goals while managing the risk of non-performing loans.”
The People’s Bank of China and the National Financial Regulatory Administration did not provide an immediate response to requests for comments. In the first quarter, consumer loans increased by 6.1%, which is slower compared to the 8.7% growth during the same period in 2024 and the 11% growth observed from January to March 2023, as reported by the central bank. Data for the second quarter is anticipated in the upcoming weeks.
As of the end of March, the overall non-performing loan (NPL) ratio for commercial banks in China stood at 1.51%, showing stability when compared to the 1.50% recorded at the end of 2024, according to official data. In contrast, smaller rural commercial banks reported a higher NPL ratio of 2.86% in the first quarter, in comparison to 1.22% at major state banks.
Pile up of Bad Loans
The difficulties faced by banks are a negative sign for governmental initiatives aimed at increasing consumer lending, which is perceived as a quicker solution than enhancing household incomes. The latter would necessitate that financially burdened local governments allocate more funds towards social welfare and salaries for civil servants, among other strategies.
Any surge in consumption fueled by debt is expected to be “transitory,” stated Lynn Song, the chief Greater China economist at ING. “Consumption driven by income growth would be significantly more desirable for attaining a more sustainable recovery,” Song remarked, noting that this presents a greater challenge for authorities.
Economists do not express concern regarding the absolute levels of household debt, which currently stand at approximately 60% of China’s economic output, in contrast to around 70% in the United States and exceeding 90% in South Korea.
Another significant challenge facing banks is the reluctance of consumers to take on debt. A survey conducted by the central bank involving 20,000 households revealed that 61.4% plan to increase their savings, marking an increase of nearly 20 percentage points compared to levels prior to the pandemic.
“The core problem is that the growth of income is decelerating, leading to increased anxiety among households, which in turn is causing them to limit their spending and borrowing,” stated Christopher Beddor, the deputy director of China research at Gavekal Dragonomics.
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