China Faces Challenges in Boosting Consumer Credit Due to Rising Non-Performing Loans and Weak Demand

Chinese banks are struggling to implement government directives aimed at increasing consumer lending, amid rising cases of personal loan defaults and weak demand for borrowing, according to banking sources and official data.

Since March, Chinese regulatory authorities have issued instructions to banks to stimulate consumer credit by offering easy loans at low interest rates, as part of plans to boost domestic consumption and alleviate trade tensions with the United States. In response, banks lowered interest rates to record levels of less than 3%, before later raising them again due to concerns about profit margins.

Bank officials and loan managers told Reuters that banks are facing dual challenges of declining household borrowing appetite and increasing default rates. A branch manager at a state-owned bank, who declined to be named due to the sensitivity of the issue, said: "It is very difficult to find borrowers for consumer loans," noting that "banks are caught between achieving lending targets and controlling non-performing loans."

He added that "rising default rates are punishing branch staff, leading many loan officers to borrow from each other to meet lending targets."

Central bank data indicates a slowdown in consumer credit growth to 6.1% in the first quarter of 2025, compared to 8.7% in the same period of 2024, and 11% in 2023. The non-performing loan ratio in commercial banks reached 1.51% by the end of March, with significant variations between large state-owned banks (1.22%) and small rural banks (2.86%).

The situation has worsened due to recent wage cuts in sectors such as financial services, industry, and the public sector, affecting households' financial capacity. Additionally, US tariffs have increased concerns about job stability and income decline.

Data from the Credit Asset Registration and Transfer Center showed that banks offered distressed loans worth 74.27 billion yuan ($10.34 billion) for sale in the first quarter of 2025, a 190.5% increase compared to the first quarter of 2024, with 70% of them being personal loans.

A loan officer at a state-owned bank said: "We have a growing pile of non-performing loans, and for many clients unable to repay, the most we can do is negotiate repayment extensions," noting that the bank prioritizes writing off bad debts rather than granting new loans.

On the other hand, a central bank survey of 20,000 households showed that 61.4% plan to increase their savings, a 20 percentage point rise from pre-pandemic levels. Christopher Beddor, deputy research director at Gavekal Dragonomics, commented: "The fundamental problem is that income growth is slowing, and households are worried, so they are restraining their spending and borrowing. It's not about the availability of low-interest loans."

Meanwhile, Lin Song, chief economist for Greater China at ING, believes that any consumption improvement based on borrowing will be "temporary," affirming that "income-driven consumption will be the better option for achieving a more sustainable economic recovery, but it poses a tougher challenge for policymakers."

While Chinese household debt remains at 60% of gross domestic product (lower than levels in the US and South Korea), the bigger challenge lies in the accelerating pace of non-performing loans in the consumer credit sector, threatening the stability of government efforts to stimulate growth.