Chinese banks stumble on Beijing's consumer lending push

New Straits Times

11-07-2025

BEIJING: Chinese banks are struggling to comply with new Beijing guidelines to boost consumer credit as they reel from a surge of defaults on personal loans and have a hard time finding households in good financial shape that want to borrow.
Since March, financial regulators have issued multiple directives urging banks to offer more, and cheaper, loans to spur consumption, as part of broader efforts to counter the impact of the trade war with the United States.
This prompted banks to market personal loans at record low interest rates below three per cent initially, before raising them back amid concerns over shrinking profit margins.
Loan managers and bank executives told Reuters they are struggling to raise consumer lending, citing subdued demand, as well as concerns over an already rapidly growing pile of bad household debt and uncertainty over their clients' incomes.
Recent wage cuts in the financial industry, manufacturing and the state sector have further dented households' financial health while higher US tariffs are fuelling concerns over jobs and income stability.
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"It's very difficult to find borrowers for consumer loans," said a branch head at a state-owned bank, requesting anonymity due to the sensitivity of the topic. "Banks are caught between meeting lending targets and controlling bad loans."
"If defaults rise, branch officers face penalties. Many loan officers borrow from each other's banks to meet lending quotas."
The People's Bank of China and the National Financial Regulatory Administration did not immediately respond to requests for comment.
Consumer loans grew 6.1 per cent in the first quarter, slower than the 8.7 per cent in the same period of 2024 and the 11 per cent in January–March 2023, according to the central bank. Data for the second quarter is expected in coming weeks.
The overall NPL ratio of China's commercial banks was 1.51 per cent as of the end of March, remaining steady compared to 1.50 per cent at the end of 2024, official data showed. Smaller rural commercial banks posted a higher NPL ratio of 2.86 per cent in the first quarter compared to 1.22 per cent at major state banks.
Official data does not disclose the NPL ratio of overall consumer loans, but the bank executives and loan managers told Reuters the defaults on personal lending have risen sharply this year.
BAD LOANS PILE UP
The banks' struggles bode ill for official efforts to boost lending to consumers, seen as a faster alternative to raising household incomes. The latter would require indebted local governments to spend more on social welfare and civil servants' pay, among other measures.
Any debt-driven jolt to consumption is likely to prove "transitory", said Lynn Song, chief Greater China economist at ING.
"Income growth-driven consumption would be strongly preferable in terms of achieving a more sustainable recovery," Song said, adding that was a more difficult task for authorities.
Economists are not concerned about absolute household debt levels, which are about 60 per cent of economic output in China, compared with about 70 per cent in the US and more than 90 per cent in South Korea.
But they worry about how quickly non-performing loans (NPLs) in the consumer debt sector have been rising.
In the first quarter of this year, Chinese banks put up 74.27 billion yuan (US$10.34 billion) of NPLs for sale, a 190.5 per cent increase from the same period of 2024, data from the Banking Credit Asset Registration and Transfer Center show.
About 70 per cent of them were personal loans.
"We have a growing pile of bad loans. For many clients who can't repay, all we can do is negotiate extensions," said a loan officer at a major state-owned bank.
The officer said his bank prioritised writing off NPLs over issuing new loans.
The Industrial Commercial Bank of China, the world's largest commercial bank by assets, said its consumer NPL ratio rose to 2.39 per cent at the end of 2024, from 1.34 per cent a year earlier.
Smaller, regional lenders are faring much worse. Bohai Bank's consumer NPL ratio jumped to 12.37 per cent in 2024 from 4.44 per cent the previous year. Harbin Bank's rose to 5.51 per cent from 3.94 per cent.
"Clients are in poor operating conditions due to the tariffs war and unable to repay their loans," said a regional bank manager.
Another key challenge for banks is that consumers do not want to borrow.
A central bank survey of 20,000 households showed that 61.4 per cent intend to boost savings — an increase of almost 20 percentage points from pre-pandemic levels.
"The fundamental issue is that income growth is slowing and households are anxious, so they are restraining their spending and borrowing," said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.