Overdue action – Bad debts in China

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    DEBT-COLLECTION videos have become a popular subgenre on Chinese clip-sharing platforms. Many feature young men deftly fielding phone calls from aggressive collectors. Some portray the abuses—hair pulling, slapping—that have come to define a business that has long gone largely unregulated in China. The result has been a Wild West for collections. Debt collectors sometimes impersonate police officers; the details of debtors’ friends and family are sold so that they can be harassed. A swift rise in personal debt, though, is forcing regulators to act.

    Between 2015 and 2019 the stock of household debt in China rose by about $4.6trn, close to the $5.1trn accrued by Americans over a similar period before the global financial crisis of 2007-09, according to data from Rhodium Group, a consulting firm. The outstanding balance of delinquent consumer receivables could reach nearly 3.3trn yuan ($500bn) next year, up from just 1trn yuan in 2015, reckons iResearch, another consultancy.

    In June the southern city of Shenzhen drafted the country’s first personal bankruptcy law. Courts routinely heard disputes between lenders and borrowers, but allowed only creditors to file suits. The new law, to be rolled out next year, will offer debtors more protection against creditors. A few other cities are conducting similar experiments, though “these reforms are still very limited,” says Li Jiao of Buren, a law firm.

    The central bank, meanwhile, issued draft rules late last year, threatening to punish banks for working with dodgy debt collectors, though it softened the language before the guidelines took effect on November 1st this year. Government pressure, say industry executives, has prompted consolidation. Some companies, such as YX Asset Recovery, have banned in-person visits and operate only call centres—a practice considered less intrusive. YX, which had more than 10,000 agents last year, has sworn off practices including selling debtor information, impersonating government officials, and threatening violence.

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    Yet the early reforms do not quite hit the mark. They have helped control debt collection for banks, but it is online lenders and microloan companies that pose a bigger risk. Delinquency rates have climbed above 30% this year at many nonbank lenders, compared to 5% for banks. Most online lenders are not targeted by the new rules and tend to hire local collections agencies that pursue aggressive, often-illegal tactics for recovering debts.

    Nor has the shift away from in-person visits eliminated debtor harassment. Physical threats seem to be being replaced by mediated forms of “emotional pressure”, applied during frequent phone calls, says Tom McDonald of the University of Hong Kong. Those seeking advice on how to deal with officious agents need look no further than the growing archive of debt-collection videos available online.

    This article appeared in the Finance & economics section of the print edition under the headline "Overdue action"

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