The three-year pandemic lockdown has had lingering effects, both psychologically and economically, and many Chinese have consequently incurred debts and faced bankruptcy. Over the past five years, China’s household debt has surged nearly 50 percent. The sharp rise in personal debt, if not resolved quickly, can have a cascading effect, further worsening the Chinese economy, according to an economist.
According to the Chinese Supreme Court’s public record, the indebted population who have defaulted, or blacklisted entities, jumped from 5.7 million in early 2020 to 8.33 million as of April 22, an increase of 46 percent. Household debt has surged 50 percent over the last five years to $11 trillion, according to the Wall Street Journal.
In China, people who fail to make debt repayments are placed on a blacklist. Those on the list cannot purchase airline tickets and high-speed rails, use toll roads, or apps like Alipay and WeChat, which can be detrimental at times because some stores for essentials do not take cash. The debtors also cannot file for bankruptcy like in the United States.
Wang Guochen, an economic scholar based in Taiwan, told the Chinese language edition of The Epoch Times that individuals with credit issues are expected to be regarded equally. However, in enforcement, the Chinese Communist Party treats ordinary citizens differently from state-owned enterprises or high-ranking officials.
Surge of Indebted Population
Mr. Zheng, a 41-year-old small business owner from Nanning in the south China Guangxi autonomous region, once thought that his small appliance factory could continue to operate smoothly and peacefully.But the three-year lockdown shattered his dreams. For a period of time, he was burdened with debts, worrying every day about paying for the necessary expenses of his factory, and suffered from insomnia for over a month. Now, he has essentially closed down his business altogether, and the factory has been handed over to someone else.
“Lockdown had a huge impact on us. The entire city came to a standstill. In some places across the country, all the traffic lights on the roads turned red. Many small business owners like us went bankrupt,” Mr. Zheng told the Chinese language edition of The Epoch Times.
Mr. Zheng expressed the immense pressure at that time: Not being able to sleep after waking up in the middle of the night, experiencing chest pains, and his worries and thoughts spiraling out of control.
His monthly expenses averaged over 60,000 yuan ($8,283), which is over 2,000 yuan ($276) per day. This includes factory rent, storefront rent, worker salaries, office expenses, travel expenses, and mortgage payments. “If we didn’t have 2,000 yuan coming in each day, we had to find a way to balance our expenditures.”
Mr. Zheng and his wife live with his two elderly parents, who are nearly 70 years old, and two children under ten. He said, “I worried about what would happen to my family, my elderly parents, children, and my wife if something happened to me. This concern lasted for over a month, and then I bought a lot of insurance for myself, just in case something unexpected happened to me, they could rely on something to survive.”
“Most of the people in our circle are basically in the same situation as me. We can live peacefully as long as nothing goes wrong. But once problems arise, it’s really difficult, almost impossible to carry on,” he said. “We are living in a tight spot. If we follow all the regulations and requirements strictly, we won’t be able to survive. For example, the costs and taxes related to taxation, environmental regulations, and fire inspections are far greater than our profits or even our revenue.”
A 2021 Chinese article revealed that during the 2020 pandemic lockdown, 460,000 small and medium-sized enterprises (SME) in China shut down, leaving 780 million people in debt. By the first 11 months of 2021, around 4.37 million SME had permanently closed.
Mr. Wang said the three-year pandemic and subsequent lockdown measures have had a serious impact on the Chinese population. In addition to the real estate sector, which was a contributing factor, the wealth of the general public greatly suffered with declining property and stock market asset prices.
He believes that to address personal debt issues, the Chinese real estate debt must be resolved first.
He said, “Real estate affects many industries, from the upstream manufacturing industries, including steel and cement, to the downstream industries, like interior decoration, aluminum doors and windows, and furniture.
“Horizontally, sectors like finance will also suffer, and local government land finances will significantly decrease due to the downturn in real estate. Without resolving the real estate issue, the Chinese economy, including employment, will only become increasingly trapped.”
However, Beijing’s strategy seems to only increase the challenges faced by ordinary citizens. He said, “Beijing authorities are diverting a significant amount of funds into future industries or strategic sectors, including semiconductors and new technologies. Yet, these industries are capital-intensive rather than labor-intensive, thus offering limited employment opportunities.”
Liquidity Trap
The sharp rise in personal debt is often not resolved quickly and can have a cascading effect, further worsening economic conditions, according to Mr. Wang.He explained that regardless of the tightening in the real estate sector or consumer spending, the ultimate impact will be reflected in enterprises, leading to a decline in their revenue, he said, “It’s a vicious cycle.”
“It’s known as a liquidity trap, where people lack the financial means and willingness to spend. Even with an increased money supply from authorities, it won’t stimulate consumption. This liquidity trap will result in a decline in the balance sheets of assets and liabilities. Consequently, people won’t be willing to borrow money for investment or consumption, posing revenue challenges for the entire banking sector.”
He mentioned the current Chinese banking crisis, in which banks have been unable to lend money effectively.
“Most of their lending is directed by policies, flowing into toxic assets such as local government or real estate bonds. Genuine, high-quality loans are becoming increasingly rare, posing operational challenges for banks,” he said.
In summary, the escalating deterioration in finance would require authorities to address the “paradox of thrift,” as described by renowned economist John Maynard Keynes.
Mr. Wang said that the paradox of thrift refers to an economic phenomenon in which individuals tend to increase savings during economic downturns. However, this saving behavior exacerbates the decrease in business revenue, further resulting in layoffs and reduced economic activity, forming a vicious cycle.
“This vicious cycle, if not broken at its core, will spiral endlessly upward and intensify continuously,” stated Mr. Wang.
