In 2025, Chinese regulatory authorities have been issuing guidelines intensively since the beginning of the year, demanding banks to increase personal loan issuance. However, the low-interest consumer loans offered by banks have failed to attract borrowers, leading to a dilemma of rising default rates on personal loans.
Analysis suggests that the Chinese economy needs more than just monetary tools; rather, it requires the rebuilding of overall confidence through measures such as increasing household income and restructuring social welfare systems.
According to a Reuters report on Friday, loan managers and senior executives at banks in Beijing revealed their struggles to increase consumer loans due to low demand. Additionally, the rapid increase in household bad debts and uncertainties in customer incomes add to the challenges faced by banks.
An anonymous branch manager at a state-owned bank stated, “It’s difficult to find borrowers for consumer loans,” indicating the dilemma banks face in meeting loan targets while managing bad debts.
Since March, various departments of the Chinese Communist Party have successively requested banks to issue more loans at lower interest rates to support consumption. The policy direction to boost domestic demand and consumption has triggered a “price war” in the consumer loan market, with interest rates hitting historical lows.
In an effort to control deposit growth, six major state-owned banks, including ICBC, ABC, Bank of China, CCB, BOC, and Postal Savings Bank of China, announced a reduction in the posted interest rates for RMB deposits on May 20. The adjustments lowered the rates across various deposit terms.
Though official data on the overall non-performing loan ratio for consumer loans is not disclosed, bank executives and loan managers informed Reuters that the default rate on personal loans has sharply increased this year.
The Bank Credit Asset Registration and Transfer Center data revealed that in the first quarter of this year, the Chinese banking industry’s non-performing loan sales reached approximately 74.27 billion yuan (about 10.34 billion USD), marking a 190.5% increase from the same period in 2024.
Regional banks, especially smaller ones, are in a precarious situation. For instance, the consumer non-performing loan ratio at Bohai Bank surged from 4.44% in 2023 to 12.37% in 2024. Similarly, Harbin Bank saw its non-performing loan ratio rise from 3.94% to 5.51%.
Regulatory data from the Chinese Communist Party’s Banking Regulatory Commission showed that rural commercial banks had a non-performing loan ratio as high as 2.86%, with a net interest margin of only 1.58%. Likewise, city commercial banks reported a non-performing loan ratio of 1.79% and a net interest margin of 1.37%, signaling an inverted yield curve.
In response to the rising bad loans, many banks have started transferring non-performing assets to clean up their balance sheets. Several banks, including Ping An Bank, CCB, CEB, and Jiangsu Bank, have listed non-performing assets for transfer at significant discounts.
Highlighting the challenges faced by banks, another issue emerges where consumers are reluctant to borrow money. A regional bank manager cited the US-China trade war as a factor affecting customers’ ability to repay loans due to declining business conditions.
Reports from various sources indicate that income reductions and job cuts have become widespread across China this year, affecting not only ordinary workers but also professionals like teachers, civil servants, and financial elites. The income decline has permeated from offices to local markets, triggering a collapse in consumer confidence and spending.
According to a survey conducted by the People’s Bank of China on 20,000 households, 61.4% planned to increase savings, reflecting a heightened level of caution compared to pre-pandemic times.
Christopher Beddor, deputy head of the China Research Department at Longzhu Economic Information, pointed out that the fundamental issue lies in slowing income growth, causing anxiety among households and leading to reduced spending and borrowing, not solely due to the inability to access low-interest loans.
The challenges faced by banks signal a bleak outlook for official efforts to stimulate consumer loans, as relying on debt-driven consumption may only provide temporary relief. Sustainable recovery requires income-driven consumption, implying the need for local governments burdened with debt to increase public sector wages and incentives.
Song Lin, Chief Economist for Greater China at ING, emphasized that any debt-driven consumption stimulus could be short-lived, advocating for income growth-driven consumption as a more sustainable approach for economic recovery.
In conclusion, when even low-interest rates fail to entice consumers, stimulating consumption cannot rely solely on banks and interest rates. Addressing more foundational aspects such as job stability, income security, and future prospects is essential. Only when households believe in increasing future incomes and stability will they be willing to borrow and consume. The next steps for the Chinese economy require not just monetary tools but the reconstruction of overall confidence.