Foreign media revealed another warning sign for China's economy: consumer credit is declining.
China's economy is showing another warning sign! People are not only cutting back on consumption, they are also becoming more conservative in borrowing money. In September, short-term consumer loans fell by 8.3% year-on-year, the largest decline on record. What’s even more troublesome is that banks are afraid that they won’t be able to get back the money they lent out, so they would rather hold back than lend. The Chinese government originally wanted to save consumption by cutting interest rates, but now it has introduced new regulations to curb violent debt collection, which may make it more difficult for banks to collect debts and make lending more conservative. If the people don’t borrow and the banks don’t lend, the official policy to stimulate domestic demand may be in trouble again!
The Economist reported that Chinese consumer short-term loans fell by 8.3% in September compared with the same period last year, the largest decline on record; consumer loan balances in August also fell to the lowest level since the COVID-19 epidemic. During the holidays in early October, the average consumption amount of people decreased by 2% compared with the same period in 2025, reflecting that the recovery of consumption is still under pressure.
Chinese households have cut back on borrowing, in part because of the continued slump in the real estate market. The decline in home sales has reduced mortgage applications, and many capable home buyers have chosen to repay their loans early. After China's household debt-to-GDP ratio reached 60% in 2020, it has remained stable for a long time and fell slightly last year.
However, the downturn in the housing market is not enough to explain the overall contraction in consumer credit. In order to stimulate domestic demand, China's Ministry of Finance began to subsidize banks last year, encouraging them to lower consumer loan interest rates and assist people in purchasing new cars, renovating houses and other large expenditures. But banks remain increasingly cautious about lending.
Gavekal, a consultancy, estimates that more than 10% of Chinese adults may have outstanding debt last year, up from less than 8% the year before, indicating that borrowers' credit risks are rising.
As the government encourages banks to lend but interest rates continue to fall, banks have begun to exclude borrowers with poor credit conditions in order to control risks. In addition, overdue consumer loans are becoming increasingly difficult to resell. In the past, banks would sell non-performing debt to investors at a discount, and investors would take over the recovery of arrears. However, the average transaction price of such debt has dropped from about 30% of the face value at the beginning of 2021 to 5% at the beginning of 2026, indicating that the market is becoming increasingly pessimistic about the prospects of recovering arrears.
The report pointed out that the decline in the value of debt may be related to the Chinese government's crackdown on debt collection operators. In the past, some debt collection companies lacked supervision and often resorted to what is known as "soft violence" tactics, including calling hundreds of times a day to harass debtors, their relatives and friends, revealing debt records to employers, and even visiting customers in the middle of the night to collect debts.
In order to curb improper debt collection practices, China has further formulated national regulations this year. Starting from August, debt collectors are not allowed to call debtors more than 6 times a day, are not allowed to contact their family and friends, and are prohibited from visiting their homes in the middle of the night to collect debts. All interactions with debtors must be recorded.
These measures can help reduce debtor harassment, but they can also have unintended consequences. Some analysts believe that collection restrictions may reduce the chances of recovering overdue loans and make it harder to sell bad debt, making banks less willing to take on new consumer loan risks.
For the Chinese government, how to strike a balance between protecting debtors and maintaining the operation of credit markets will become a major challenge in stimulating consumption. When people's willingness to borrow decreases and banks tighten lending, even if the government lowers loan interest rates through subsidies, it may not be able to effectively stimulate consumption.
