This November, Chinese media reported that a 42-year-old restaurant owner in the central Henan province — who had made a name for himself by passing out free meals to medical workers — died by suicide after severe floods and yet another local outbreak of COVID-19 left his mired business hopelessly in debt.
That same month, a court in the southern megacity of Shenzhen made national headlines by approving a bankruptcy petition from a single mother and former small-business owner. The court ruled that if the woman agreed to submit to an “observation period” in which all her income, minus a base amount to meet her everyday needs, would be handed over to her creditors. Her remaining debt would be discharged at the end of the three-year period.
The Shenzhen ruling was the first time a Chinese court approved an application for the liquidation of personal debts. Although it was not linked to the Henan case, it did represent a brief ray of light for China’s beleaguered debtors, giving them new hope — not just for potential financial relief, but also for a reduction in social stigma.
If public reactions to the Shenzhen case are any indication, however, there is still a long way to go before personal bankruptcy is widely accepted in China. Online, reports of the Shenzhen ruling led some to jokingly ask whether they still needed to pay their credit card debts. The popular response reflects both long-term institutional problems as well as cultural prejudices regarding personal bankruptcy. There are very few cases of legally sanctioned debt forgiveness in Chinese history. Although the People’s Republic trialed a law on corporate bankruptcy beginning in 1986 and later formalized it in 2007, the right to bankruptcy has never been granted to natural persons.
Between the nationalization of industry in the early 1950s and the advent of “reform and opening-up” in the late 1970s, this was less of a problem. Since the economic reforms of the 1980s, however, many Chinese individuals’ and families’ debts have accumulated in tandem with their assets. Reforms to the non-state sector and especially financial institutions have made loans more accessible to regular individuals, and people are saving less while increasing their investments, spending, and debts. Leveraging — investing with borrowed capital — has become common practice among entrepreneurs and stockholders, leaving them vulnerable to fluctuations in the stock and bond markets, while the end of workplace-provided public housing coupled with a booming real estate market and rising consumerism is crushing many ordinary Chinese under a mountain of mortgage and credit card debt.
These problems have grown more acute over the past decade, as largely unregulated informal and digital finance services with low thresholds and high interest rates flourished nationwide. As the number of people saddled with insurmountable debt continued to rise, so too did the frequency of debt-related tragedies: murders, suicides, and organ sales.
Part of the problem is that Chinese legal and social norms have failed to keep pace with the country’s increasingly complex financial reality. Our institutions as they stand now are incapable of effectively sharing and resolving the burden of personal debt. Although China has a corporate limited liability system in place to shield shareholders from corporate losses, in practice, financial institutions often require company shareholders or controllers to assume joint responsibility for corporate debt, so that “limited liability” often exists in name only. As a result, failed entrepreneurs can find themselves saddled with astronomical debts when their businesses go under.
After the rise of informal financial practices, like loan sharking, led to chaos and began threatening social stability and economic growth in the mid-2010s, the central government finally intervened. Yet the system, which endangers debtors and overprotects creditors, has not fundamentally changed. Insolvency caused by failed business ventures and investments is still widely viewed as a personal tragedy that must be shouldered by an individual, rather than a societal problem that can be addressed through legal means.
In fact, many debtors’ financial failures have little to do with their own personal shortcomings. A combination of factors out of their control, such as economic slowdowns, natural disasters, or illness, can lead to a massive accumulation of debt. For example, coronavirus outbreaks and lockdowns have strained small businesses over the past two years, as have disasters like the Henan floods. Although the Chinese government has rolled out relief plans to help small business owners cover rent and taxes, businesses and individuals who are already up to their necks in debt require a larger variety of options for relief, up to and including access to personal bankruptcy.
Over the past two decades, scholars and legal practitioners have called for establishing a nationwide personal bankruptcy system. In the absence of national legislation, some regions have begun testing legal methods for personal debt reorganization or liquidation. Since late 2018, courts in the eastern Zhejiang province have heard more than 500 cases relating to personal bankruptcy. The neighboring Jiangsu province has designated “pilot courts” for personal bankruptcy applications, which have heard a total of 170 cases. A similar pilot program has been put in place in the northern city of Zibo. And in August 2020, Shenzhen used its unique legal status to promulgate city-wide personal bankruptcy regulations, including a set of judicial procedures for handling bankruptcy cases.
Yet these experiments have all run up against institutional and cultural obstacles. Take Shenzhen, for example. Although the city theoretically allows people to file for bankruptcy, its rules only apply to Shenzhen residents who have participated in the city’s social insurance program for at least three years. In trial programs elsewhere, the lack of formal legislation means the scope of debt discharge is generally determined through negotiations between debtors and creditors. The fate of debtors thus depends to a great extent on the generosity of creditors. When there is a significant power imbalance between debtors and creditors — for example, when individual debtors are locked in a dispute with large financial institutions — creditors clearly have the upper hand in negotiations. In other cases, creditors may refuse to participate. And even if they win an exemption from paying interest, debtors must often still pay back the full sum of the principal.
With a personal bankruptcy law finally on the horizon, it is imperative that China’s legal community moves quickly to test and improve any potential regulations in local trials. That requires expanding the scope of ongoing trials, empowering courts to accept and hear personal bankruptcy cases more efficiently, and promoting the cooperation and mutual recognition of bankruptcy decisions across regions. It is then incumbent upon courts to ensure that the amount debtors are expected to repay is in line with their ability, future income, and expenses. Only then will any potential personal bankruptcy system be able to provide a truly “fresh start” for desperate debtors and their families — many of whom have been hard hit by the pandemic.
The problems debtors face are social as well as legal. Traditional norms demanding all debts be repaid in full remain deeply ingrained. Although there has been a growing recognition that some debtors are honest but unfortunate or otherwise vulnerable, negative attitudes toward debt and debtors continue to be shaped and boosted by creditor-friendly policies and media coverage. In 2010, the People’s Supreme Court introduced a policy which forbids parties that have failed to fulfill their court-ordered obligations, including the settlement of debts, from taking part in so-called high-level consumption like travelling by plane or buying real estate. Anyone subject to these restrictions is added to a publicly accessible online list. News outlets, confusing people’s inability to repay debt with malicious debt evasion, often reflexively refer to members of the list as laolai, or “deadbeats.” This reductive, moralistic language has reinforced stigmas related to debt and made life even harder on the country’s honest yet “unfortunate” or “vulnerable” debtors.
It’s also worth keeping in mind that, unlike in the past, the majority of creditors today are financial institutions. In the current regulatory environment, new technologies have given institutional creditors a significant advantage when it comes to predicting and controlling risks, and they should shoulder a correspondingly greater degree of responsibility. Blindly defending creditors’ interests encourages irresponsible lending behaviors, insulating them from risk and creating a moral hazard. Not to mention, the same losses can be far more devastating when they fall on individuals and families. They can sometimes amount to a matter of life and death.
The way we perceive debt reflects how we perceive each other. The world is only going to become more uncertain moving forward. Any one of us could one day fall into excessive debt and find ourselves in a hopeless situation. Making personal bankruptcy accessible to the public isn’t letting debtors off the hook. It merely ensures that, if and when we run into trouble, we still enjoy the right to dignity.
Translator: Lewis Wright; editors: Cai Yineng and Kilian O’Donnell; portrait artist: Wang Zhenhao.
(Header image: Aflo/People Visual)