The View | If China is serious about cracking down on its mountain of debt, it must stop sending mixed signals

While senior officials stress the need to repay debt, the government has made it harder for creditors to recoup loans

Conflicting messages from the government and judiciary have emboldened irresponsible borrowers

Reading Time:4 minutes

A worker walks past piles of scrap steel at a plant of Dongbei Special Steel Group in Dalian, Liaoning province, in March 2018. The company failed to repay 10 batches of corporate bonds worth US$1 billion from March 2016 onwards, leading to a legal battle between the company and its 1,911 creditors. After a court-ordered “bankruptcy restructuring” plan in which creditors lost 78 per cent of their money, and a windfall from a steel price rally, the company bounced back. Photo: Reuters

Published: 5:00am, 19 Dec 2019Updated: 5:54am, 19 Dec 2019

If “three steps forward and two steps back” is China’s typical rhythm, we are now in the regressive stage, at least in the banking sector. Both the government and the public seem to be working hard to sabotage the country’s fragile credit infrastructure.

In the Tang and Song dynasties, delinquent borrowers were often sent to prison. After the last Chinese emperor was forced out in 1912, however, chaos prevailed and creditors took justice into their own hands. After the communist revolution in 1949, the economy was nationalised and the primitive credit system disappeared.

When I was a junior officer at the People’s Bank of China in the 1980s, Beijing was just starting to rebuild credit infrastructure, and the central bank was being spun off from the ministry of finance. We occupied just two floors in the ministry’s Soviet-style building. Tucked into the attic floor was China Construction Bank, then called the People’s Construction Bank of China.

Both the People’s Construction Bank of China and the central bank were but tiny afterthoughts in the government apparatus because we were just cashiers for the ministry. Loans did not always have to be repaid. After all, only state-owned enterprises had access to bank funding and consumer credit did not exist.

Almost four decades on, the effects of that socialist history linger on. Some people just do not feel like repaying their debts, while borrowers do not always consider their ability to repay debts when they ask for loans. For four decades, binge borrowing has been hugely rewarded by asset price inflation and a growing economy.

In 1999, it became clear that China’s banking system had been crippled by “triangular debt”. Debtor prisons would have helped resolve the problem quickly, but the government chose a lazy solution. Without tackling the cause of the problem – cultural ills and borrowers’ irresponsibility – it created four asset management companies (Cinda, Huarong, Orient and Great Wall) to take over almost all the assets of the five major banks.

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.css-1m2rp1p{color:#34b8b5;}The View | If China is serious about cracking down on its mountain of debt, it must stop sending mixed signals

The View | If China is serious about cracking down on its mountain of debt, it must stop sending mixed signals