China Considers SMB Bankruptcy Path

Chinese regulation does not offer a way for individuals to discharge the debt they cannot pay. According to reports in The Economist, small business (SMB) owners are most at risk for regulatory crackdowns when they cannot repay their loans.

The publication said on Thursday (May 30) that small businesses are often required to provide a personal guarantee when obtaining a small business loan. Government encouragement to boost borrowing and SMB loan volume has steadily increased since 2007.

However, the prevalence of shadow lending has introduced new risks for small business borrowers unable to repay their loans, and collectors are deploying new, concerning tactics to get their money back, said reports. Chinese lawmakers are gearing up to discuss next month potential changes to the nation’s existing corporate bankruptcy law, which could introduce an opportunity to enact personal bankruptcy legislation.

“Disreputable [lenders] have required borrowers to surrender the contacts stored on their mobile phones, so that family and colleagues can be hassled if payments are missed,” The Economist stated, pointing to other, more humiliating tactics that lenders and collectors have used.

Chinese regulators have responded by increasing awareness and education on responsible borrowing, but some are also calling for the country to introduce a bankruptcy law.

More than a decade ago, regulators reformed the nation’s corporate insolvency laws, but failed to include small businesses and consumers in the effort, according to reports, with policymakers fearing a rise in debt-dodgers. However, the increase in digital finance and payments has heightened transparency in the financial sector, making it more difficult to hide from debts.

China University of Political Science and Law’s Professor Li Shuguang told the publication that introducing a bankruptcy law for individuals and SMB owners would lower financial risks, while providing support to borrowers in need of aid.