Liang Wenjin became the first debtor to benefit from a law introduced in Shenzhen that. allows long-time residents to seek bankruptcy protection from creditors
Debts like Mr Liang’s have risen quickly. From less than 40% ofin 2015, household loans exceeded 62% at the end of last year. The biggest chunk was mortgage debt, a by-product of China’s runaway property market. “Operating loans” of the kind weighing on Mr Liang accounted for about a fifth of the total.
These debts are now complicating the government’s efforts to sustain China’s growth. Having fought a tough battle against financial risk, policymakers are vowing to remain “vigilant in times of peace”. To this end, they want to stabilise debt and cool the housing market. But they also have a third goal of spurring consumption to support a recovery that cannot rely on continued strength in exports.
The first two goals may be at odds with the third. On July 23rd the ministry of housing and seven other departments released tighter financial rules for the property sector. These come on top of the “three red lines” drawn last year, which limit the size of developers’ debts relative to their assets, equity and cash. Mortgage costs have risen. And the ratio of household debt has stabilised for now. But sales of cars and household appliances have lagged behind.
High debt does not prevent China’s state-owned enterprises from splashing out when the economy requires it. They can count on banks to roll over their loans in a pinch. But households are not so lucky. The country has no bankruptcy law for overstretched individuals, who can face harassment, intimidation and blacklisting. Under the Qing dynasty, those who were late repaying their debts could be whipped with bamboo. Nothing like that happens today. But the stigma remains.
Hence the interest in Mr Liang’s fate. This month he became the first debtor to benefit from a law introduced in Shenzhen in March, which allows long-time residents to seek bankruptcy protection from creditors. He has promised to repay the principal he owes over three years. During that period, his household will live on no more than 7,700 yuan a month. He cannot travel in first-class on high-speed rail, patronise golf clubs or stay in hotels with more than three stars.
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