Debts are drowning tens of millions of Chinese.

As a percentage of Chinese GDP, household debt has risen from less than 11% in 2006 to more than 60% today, close to the levels of wealthy countries. Lenders include state-owned banks and technology platforms. According to research consultancy Gavekal Dragonomics, between 25 and 34 million people could be in default today. If those who are only in arrears are included, the total could be between 61 and 83 million; that is, between 5% and 7% of the total population aged 15 and over. In both categories, these figures are double those of five years ago, the company estimates. Against a backdrop of high youth unemployment and a slumping housing market, the situation is likely to worsen.

In China, dealing with personal debt remains embarrassing and unusual. And the government is struggling to lend a hand, because it's preoccupied with addressing debt across the system: local government debt remains painfully high; and corporate debt is uncomfortably high. Household debt is yet another concern. It doesn't pose an imminent threat to financial stability, but it increasingly weighs on the behavior of the middle class, inhibiting their spending and undermining the belief in ever-increasing prosperity that the Communist Party considers crucial to maintaining its rule.

Chinese households have a cushion: overall, their savings-to-disposable income ratio was nearly 32% in 2023, according to JP Morgan. That's much higher than the rate of less than 3% recorded in the United States in the years leading up to the 2007 global financial crisis. However, in the boom years, borrowing money for housing seemed like a safe bet, especially because jobs were plentiful and stable. People got used to spending money borrowed from large online lenders like Alipay and WeBank. Others took out loans to invest in family businesses. Then, in 2020, came the lockdowns caused by COVID-19, and the following year, the onset of the housing crisis. Whatever the source, the result for many has been debt problems and interactions with cuigou, or "pressure dogs" (i.e., aggressive debt collectors).

Let's start with the real estate sector. Housing loans accounted for 65% of household loans last year (excluding business loans). Most mortgage loans are issued by state-owned banks, which must be cautious about recovering money from those unable to pay. The number of foreclosed homes auctioned off last year was 366,000, slightly higher than the 364,000 expected in 2023, according to China Index Academy, a private research company. The number of people defaulting on their mortgages could be growing much faster. Regulators are wary of aggressive foreclosures targeting people's primary homes, fearing the outbreak of public protests. And banks may have another problem on their minds. In such a depressed current market, auctioning a property may not recover the mortgage. Online lenders, who offer a more modest portion of mortgages, can be much tougher when it comes to recovering their money.

Spendthrifts are another group in trouble. Lily, a millennial from Shanghai, began experiencing debt problems when her employer, a software company, stopped paying her salary due to its own cash flow difficulties. She owed 30,000 yuan to online lenders. To get by, she has turned to monetizing her debt, turning stories of her downfall into a way to make money as an influencer. Lily describes her hardships as a debtor in short videos on social media, but she has yet to find success. Some of the most popular ones have hundreds of thousands of followers. “Some people even compete with each other: 'I owe 10 million yuan; I owe 100 million yuan,'” she says.

Now consider investment-related debts. Bai ran a highly successful education business in Hangzhou and took out personal loans worth millions of yuan to invest in it. Many Chinese borrow money to boost family businesses, and lenders often require personal guarantees, putting households at risk if the projects fail.

At its peak, Bai's company offered private tutoring for between 50,000 and 60,000 students across some thirty locations, generating annual revenue of between 100 and 200 million yuan (€12 million to €24 million). Then came COVID-19 and the political campaign against private tutoring. Bai had to sell his house and car to pay off his debt.

She says dealing with the banks was the easiest part. The government urged them to be lenient with debtors whose businesses had been affected by the pandemic, and they agreed to waive tens of thousands of yuan in interest. The difficult part was negotiating with the debt collectors hired by the online lenders from whom she had borrowed money for personal use. They repeatedly called her, her friends, and her family, often from different phones so they couldn't be blocked. Bai is especially furious about the harassment of her parents. "In China," she explains, "we don't usually tell our parents bad news, so they were very affected." Bai fell into depression and contemplated suicide. Her husband divorced her.

In China, regulations regarding the debt collection industry are new and unevenly enforced. Instead of helping Bai, a court placed her on a "social credit" blacklist, which meant she could no longer travel by plane, use high-speed trains, or stay in luxury hotels.

And where can debtors find relief? Support groups for them have been growing online. Jiaqi Guo, from the University of Turku in Finland, studied one such group called the Debtors' Alliance, created on the social media platform Douban. Founded in 2019, it now has more than 60,000 members. Guo says users often talk about shesi, which means "social death." The term refers to the destruction of relationships caused by "contact bombardment," as they call phone calls from debt collectors.

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As the number of those in debt increases, the government has attempted to show a modicum of sympathy for their plight. Last year, it banned debt collection agencies from threatening violence, using abusive language, or calling people at inappropriate times. It also reminded lenders to protect personal information (presumably, to stop misusing contact details). However, data protection rules are laxly enforced in China. Complaints voiced on the debtor forum indicate little change in the threatening and intrusive behavior of debt collectors.

One reform that could help is the introduction of a personal bankruptcy law similar to those in wealthy countries to protect debtors from claims that leave them destitute. The lack of such legislation has fueled the growth of online lenders offering high-interest loans to desperate defaulters. In 2021, Shenzhen became the first city to introduce a personal insolvency law. However, its implementation has been timid. By the end of September 2024, more than 2,700 people had applied for the law's protection, but the courts had only accepted about 10% of the cases. Other places have also launched similar pilot programs. However, the government does not appear to be in a hurry: creditors are often large state-owned enterprises. Officials are concerned that a national law could lead to reckless spending or speculative investments.

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Translation: Juan Gabriel López Guix