China Faces Economic Crisis as Record Defaults Signal Deepening Financial Strain Amidst Pandemic Fallout and Political Tensions

China is grappling with a significant economic downturn reminiscent of the 2008 global financial crisis, with a record number of borrowers facing defaults.

“Defaults by Chinese borrowers have surged to an unprecedented level since the Covid pandemic as the country faces huge economic challenges.”

According to official records, an alarming 8.54 million individuals in China, predominantly aged between 18 and 59, are now officially blacklisted due to missed payments on various financial obligations, spanning from home mortgages to business loans.

“This figure has sharply risen from 5.7 million defaulters in early 2020, as lockdowns and economic restrictions stemming from the pandemic significantly impacted economic growth and household incomes.”

The surge in defaults, representing approximately one percent of working-age Chinese adults, poses a substantial risk not only to China’s economy but also to the global economy.

“Making the situation worse for individuals, China also does not have any personal bankruptcy laws, intensifying the financial and social repercussions of escalating debt.”

Under Chinese law, defaulters on the blacklist encounter restrictions on various economic activities, including purchasing plane tickets and conducting transactions via popular mobile apps such as Alipay and WeChat Pay.

“The economic strain is also visible in the surge of household debt, which almost doubled over the past decade to 64 percent of the Gross Domestic Product (GDP) in September.”

Wage growth has stagnated or even turned negative amid the economic downturn, exacerbating the challenge of meeting financial obligations for many Chinese consumers.

“The economic challenges extend to the job market, with youth unemployment reaching a record 21.3 percent in June. Authorities have even stopped reporting this data.”

Financial institutions are feeling the squeeze as well, with China Merchants Bank reporting a 26 percent uptick in bad loans from credit card payments that were 90 days overdue in 2022 compared to the previous year.

“As the number of defaults rises, legal experts have proposed introducing personal bankruptcy laws to provide relief for individual insolvencies.”

However, the lack of transparency surrounding personal finances renders the implementation of such measures nearly impossible. Government officials and other interest groups are likely to oppose these policies, fearing exposure of corruption.

“Adding to China’s challenges, a recent pneumonia outbreak further strains the nation. The Department of Health recorded 182,721 cases as of November 11, surpassing the 158,307 cases reported from January to October last year.”

This economic crisis unfolds against a backdrop of escalating tensions in the region, particularly with Taiwan gearing up for a new presidential election, which adds complexity to the geopolitical dynamics in the Asia-Pacific region.

President Xi Acknowledges Economic Struggles in New Year Speech: China Grapples with Downturn, Job Woes, and Heightened Tensions Over Taiwan

President Xi Jinping, in his New Year’s Eve speech, acknowledged the economic challenges faced by China’s businesses and job seekers, marking the first time he addressed such issues in his annual messages since 2013. This acknowledgment comes at a crucial time for the world’s second-largest economy, grappling with a structural slowdown characterized by weak demand, rising unemployment, and diminished business confidence.

Xi openly admitted the difficulties faced by some enterprises and individuals in finding jobs and meeting basic needs, stating, “Some enterprises had a tough time. Some people had difficulty finding jobs and meeting basic needs.” His televised remarks, widely circulated by state media, emphasized the gravity of the situation: “All these remain at the forefront of my mind. We will consolidate and strengthen the momentum of economic recovery.”

In sync with Xi’s speech, the National Bureau of Statistics (NBS) released its monthly Purchasing Managers’ Index (PMI) survey, revealing a decline in factory activity in December to the lowest level in six months. The official manufacturing PMI dropped to 49 last month, down from 49.4 in November, indicating a contraction in the manufacturing sector for the third consecutive month.

China’s massive manufacturing sector had been experiencing weakness throughout 2023, with a brief pickup in the first quarter followed by a contraction for five months until September. The economic challenges were further compounded by a prolonged property downturn, record-high youth unemployment, weak prices, and financial stress at local governments.

In response to the economic downturn, Beijing has implemented various measures to revive growth and spur employment. Despite these efforts, the government’s increasing emphasis on state control over the economy, at the expense of the private sector, has unsettled entrepreneurs. The crackdown on businesses in the name of national security has also deterred international investors.

A recent development highlighting this trend was the People’s Bank of China’s approval of an application to remove controlling shareholders at Alipay, the widely used digital payment platform run by Jack Ma’s Ant Group. This move officially marked Ma’s relinquishment of control over the company, part of his broader withdrawal from online businesses. Ma’s companies were among the initial targets of Beijing’s crackdown on Big Tech, viewed as having gained excessive power.

President Xi’s New Year’s speech also included a pledge regarding Taiwan, emphasizing China’s longstanding stance on the self-ruled island democracy. Xi stated, “China will surely be reunified, and all Chinese on both sides of the Taiwan Strait should be bound by a common sense of purpose and share in the glory of the rejuvenation of the Chinese nation.” This comes just two weeks before Taiwan’s presidential elections on January 13.

Xi’s comments on Taiwan were more assertive compared to the previous year, reinforcing his commitment to making Taiwan an integral part of his broader goal to “rejuvenate” China’s global standing. The Communist Party claims Taiwan as its own territory and has not ruled out the use of force to bring the island under its control. The upcoming election in Taiwan, where Vice President Lai Ching-te is seen as a frontrunner, has heightened tensions, with accusations from Taipei about Chinese influence operations ahead of the polls.