International

As China’s Banks Encourage Loans, Default Fears Mount

More than 12 state-owned financial institutions in China are offering incentives to boost consumer lending despite an increase in the number of people defaulting, a report in The Financial Times (FT) indicated on Sunday (March 22).

“We have to take part in the operation because the government wants to support the real economy with cheap credit,” a bank official in the risk management department told FT. “These loans may go under if the economy continues to weaken.”

The coronavirus pandemic has triggered economic demise in the country where the outbreak began, with retail sales dropping a record 21 percent in the initial eight weeks of 2020. Lenders told FT that since January, they have seen a 60 percent spike in their “overdue personal loan ratio.”

“How could demand for consumer loans hold up when cars sales collapse and tourism spending plummets,” said Ji Shaofeng, a former banking regulator. “The main reason for people to borrow right now is to pay off debt, and those borrowers are likely to default in an economic downturn.”

Beijing is looking to personal loans as a partial way out of the economic crisis even though analysts have warned there could be more defaults. 

China Banking and Insurance Regulatory Commission official Ye Yanfei said the government would “count on” borrowing to boost sales.

The Industrial and Commercial Bank of China slashed interest rates on personal loans to 4.4 percent from over 6 percent at the end of 2019. The lender has also upped how much loan money people could borrow by up to a third.

Loans had been tightened just months ago in a move to lower credit risks.

Zhou Lifeng, chief risk officer at Hangzhou-based Sunyard FinTech, is worried as defaults mount. He said his clients are seeing a 20-50 percent increase in “non-performing consumer loans.” 

“The virus has given a huge boost to overdue loans because many people have lost their jobs and are unable to repay debt,” said Zhou.

As COVID-19 rips through the U.S., recently-reopened factories in China could further suffer due to U.S. protocols in place. 

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