For most of the loans in China’s financial system, when they turn bad there is some sort of security that allows the lender to claw back some, or even most, of what they’re owed. Much of that collateral takes the form of real estate, but collateral can also range from warehouses and factories in the case of corporate loans to diamonds, tea, and bottles of baijiu in the case of wealth management products.
But what if there’s no collateral? What happens when financial institutions broadly, and banks in particular, make unsecured loans?
Not long ago, these questions didn’t really matter. To the extent that banks made loans that weren’t backed by collateral, it was to the most credit-worthy state companies. But in recent years that has changed as retail loans—that is, loans to individuals and households—have become an increasingly important part of banks’ business.
As recently as a decade ago, retail loans—be it for housing or consumption or to operate a small business—were still relatively unusual. Today they have become a near ubiquitous aspect of urban middle-class life in China. While many of those loans are backed by some sort of security. The exception, as is the case everywhere in the world, is credit cards.
While credit cards—that is, unsecured consumer lending—doesn’t pose a systemic threat to China’s financial system, it is nonetheless increasingly important to understand how China’s banks deal with them when cardholders can’t repay what they owe. Firstly, credit cards have become an increasingly important source of business for many of China’s larger banks. Credit card lending currently accounts for about 10.6% of all outstanding bank loans, up from about 3% a decade ago. Consequently, the ability of banks to deal with credit card delinquencies will become more important as China’s economy continues to slow.
Secondly, and perhaps more significantly, China’s relatively recent embrace of consumer debt will exacerbate the pressures China’s economic slowdown places on many families. The mechanics of how that debt is dealt with has the potential to either amplify or alleviate those pressures. On the face of it, China’s financial institutions deal with delinquent credit card debt in similar fashion as US financial institutions. The key difference is the regulatory regime that protects consumers. Given a much longer history of consumer borrowing, the United States has strong regulations that protect consumers, whereas China’s patchy regulatory regime is a work in progress.
Consequently, while the quality and professionalism of debt collection in China—both by the banks themselves and the third-party collection firms they employ—has improved markedly in recent years, there’s still some way to go. This report will focus on the mechanics of outstanding credit card debt resolution, and the quirks that have shaped the Chinese system.
Betting on Consumers
At the end of 2017, the 85.1 billion yuan worth of delinquent credit card debt—or credit card nonperforming loans (NPLs)—represented only 5% of what was then 1.7 trillion yuan of total bad loans in China’s banking system. Similarly, credit card NPLs as a portion of total bank NPLs remains low at 1.6% as of the end of 2017. This is down from a peak of 1.9% a year earlier, and moderately better than 1.74% across all types of NPLs (see Figure 1). However, even as the NPL ratio remains low, the absolute volume of delinquent credit card debt is growing faster than both corporate and other types of retail debt because credit cards, as a share of overall bank lending, has been rising rapidly.
Figure 1. Low Credit Card NPL Ratio, But Surging NPL Volumes
Source: Wind, MacroPolo.
For instance, at the end of September 2018, the amount that banks lent via credit cards totaled 14.7 trillion yuan, equivalent to 10.6% of all outstanding banks loans. That figure is up from 891 billion yuan, or 3% of outstanding loans, at the end of September 2008 a decade ago.
Credit card lending is particularly important to several of China’s joint stock banks. At the end of June 2018, about 21% of Ping An Bank’s outstanding loans were in the form of credit card debt. For Everbright Bank the figure was 15.7%, and 12.3% for Shanghai Pudong Development Bank (see Figure 2). But even at banks for which credit card lending occupies a lower share of their overall business, credit cards are becoming increasingly important, with a greater proportion of new loans made each year being extended through credit cards (see Figure 3).
Figure 2. For Some Banks, Credit Card Lending Has Become a Major Business
Breakdown of total outstanding loans by type at the end of June 2018, (in billion yuan)
Source: Wind, MacroPolo.
Figure 3. For Other Banks, A Major Part of New Lending is Through Credit Cards
Annual increase in credit card loans as a share of total annual new loans
Note: SPDB stands for Shanghai Pudong Development Bank; ABC stands for Agricultural Bank of China; BOCOM stands for Bank of Communications.
Source: Wind, MacroPolo.
Therefore, to keep absolute levels of credit card NPLs in check—and to maintain a healthy credit card NPL ratio—it has been necessary for banks to aggressively dispose of delinquencies. While the total volume of disposals is unavailable, in 2018 the volume of delinquent credit card debt packaged into asset-backed securities (ABS) alone came to 45.3 billion yuan, equivalent to 53% of the total outstanding credit card NPLs at the end of 2017.
It is reasonable to expect that the ability of credit card users to repay their debts could deteriorate as the economy slows, unemployment rises, and mortgage stress worsens. In its 2018 Financial Stability report, published in November, the People’s Bank of China (PBOC) noted that “Some households were overburdened by their spending on house purchases; consequently, they have to resort to short-term consumption loans to maintain their consumption.” The PBOC didn’t say how widespread such distress had become.
Outsourcing the Cleanup
The rise of credit card debt has been a boon for a little discussed emerging industry: debt collectors. Some of the biggest and best run debt collection agencies depend on credit card debt—but the emergence of consumer loan companies, online lending, P2P, and auto loans has further fueled demand for debt collection services. Based on data compiled by a debt collection industry group, as of mid-2017 there were anywhere between 2,500 and 3,500 debt collection firms in China that together employed 300,000 people. That’s comparable to the United States where, according to the US Department of Labor, in 2016 there were 305,700 people employed as “bill and account collectors.” The size of the industry in China is all the more significant given that for years debt collection companies were illegal in China (and even today there remain some gray areas). Their proliferation seems to be less the result of the government changing its mind rather than the authorities tacitly recognizing an acute need for such firms and thereby allowing the debt collectors to get around the rules.
For the most part, Beijing’s campaign to prevent the emergence of debt collection companies centered around not allowing companies to register as “debt collection agencies” (讨债公司). From 1988 to 2000, various Chinese government agencies, including the courts, the police, the State Administration of Industry and Commerce, and the State Economic and Trade Commission, have repeatedly stated that “debt collection agency” was not a legitimate category under which a company’s business scope could be registered. Technically, only certain law firms have the right to engage in debt collection. Debt collection firms have gotten around the moratorium by registering their business as being engaged in “asset recovery services” (催收资产服务) or “credit advisory operations” (信贷业务咨询).
That said, China’s debt collection industry has a major reputation problem, with a number of high-profile scandals still very fresh in the public’s memory. In 2017 a group of 14 women between the ages of 50 and 70 were jailed for 11 years because of how they went about collecting debts, which included hitting debtors, spitting on them, yelling at them, and shaming them publicly. That same year a man killed a debt collector after he and two colleagues assaulted his mother. In recent years, there have been a number of reports of student suicides brought on by harassment from debt collectors.
Less high-profile intimidation tactics involve repeatedly filling keyholes with glue so that people can’t get inside their homes, and drawing a black border around the name plaque on debtors’ mailboxes. A couple of years ago, the Global Times reported that some debt collectors were stripping debtors naked and then throwing them in a river as a tactic to get them to pay. Guidelines released by the Shenzhen Internet Loan Association in 2017 aimed to self-regulate debt collection practices, banned the use of big character posters and the brandishing of tattoos to threaten borrowers, which gives some indication of other commonly used practices. Other debtors complain of harassment—constant phone calls, as well as family and friends being contacted about helping repay the debt.
Part of the problem is that Beijing doesn’t have a set of regulations like the US Fair Debt Collection Practices Act that protects the rights of delinquent debtors. Those rules ensure that debt collectors can only contact the debtor, the debtor’s spouse, and debtor’s level representative about the debt, and that they can’t bother the debtor at unreasonable times of the day. In contrast, China’s debt collection industry is governed by a patchwork of regulations. For example, existing criminal laws offer protection against violence and intimidation. However, that leaves space for debt collectors to engage in softer forms of harassment.
That’s starting to change as industry groups have stepped in with self-imposed guidelines. In March 2018, the National Internet Finance Association of China issued trial guidelines that demand debt collectors be polite in their interactions with debtors, and that they don’t harass them by calling them multiple times a day. It has also set up an online platform for complaints. The Shenzhen Internet Loan Association’s rules were more prescriptive—and far closer to protections afforded US borrowers—by barring collection agencies from contacting debtors before 8am or after 9pm, from contacting them more than three times a day, and from harassing the friends, family, and classmates of debtors. The guidelines also banned debt collectors from disclosing the details of a debtor’s outstanding debts—or threatened to disclose them—to QQ or Weixin groups of the debtor’s family or friends.
However, most of the abuses outlined above are at the hands of debt collectors working for non-bank financial institutions, like internet finance platforms. Such businesses are relatively new to regulating debt collection, and their debt collectors have a far worse reputation than those engaged in collecting delinquent credit card debt for the banks.
That’s because in 2009, the China Banking Regulatory Commission (CBRC) took a novel approach to improving the behavior of debt collectors working for banks. Rather than impose rules on debt collection firms, over which it had no authority, it forced banks to take responsibility for the behavior of the debt collection firms with which they contracted.
“The ineffective management of collection outsourcing firms has resulted in damage to debtors’ and other related parties’ legal rights, the banking industry will assume responsibility of managing outsourcing risk,” the CBRC said in a 2009 notice. In 2011, the CBRC followed up with a further notice in which it specified that debt collectors aren’t allowed “to use violence, threaten, intimidate, or curse debtors,” and that all interactions between debtor collectors and debtors must be recorded, and the recording preserved for two years. The specifics are up to the banks, but the rules give borrowers cause to complain if they feel harassed.
Bigger, Better, and Boring
Banks outsource to dozens of debt collection agencies around the country, many of which have a reputation for being some of the biggest and the best run. For instance, at least one agency has more than 10,000 employees predominately based in one office park—who are mainly engaged in credit card work. According to its NPL ABS prospectuses, China Merchants Bank has signed agreements to work with 40 debt collection companies. Minsheng Bank said that it had outsourced debt recovery to 87 such firms.
A bank will typically allot the debt collection company a portfolio of bad loans for which it gets paid a fee for every yuan it retrieves within a set period of time. Loans that have been overdue for only a few months are easier to recover and so command a relatively low commission. Those outstanding for more than six months generate higher fees. Consequently, a debt collection company might be paid anywhere between 50% and less than 4%, depending on the customer and how long the debt has been delinquent (Big Four banks pay less, and online lenders pay more). Typically, a debt collection firm will be tasked with pursuing repayment on a portfolio for a set period of time, after which another company takes over responsibility.
The process typically involves sending a debtor text messages, followed by phone calls, and then visits in person (although this is generally rare for credit cards). The debt collectors can offer to reduce the interest and fees that have accumulated as an incentive to get the debtor to pay (the exception being the Big Four banks and the Bank of Communication. Under 2005 rules they’re not allowed to offer discounts on what’s owed. According to Zhao Yuzi, the former general manager of China Construction Bank’s (CCB) credit card center, joint stock banks can forgive interest payments as long as their board of directors approves).
It’s worth noting that banks don’t have the freedom to dispose of overdue credit card debt—or retail loans more generally—in the same way as corporate loans. In 2005, the Ministry of Finance declared that the Big Four banks and the Bank of Communications cannot transfer loans made to individuals in bulk to the AMCs, and in 2012 it extended the rule to the broader banking system. It also differs from the US where banks sell portfolios of delinquent credit card debt to third-party debt buyers at steep discounts. For Chinese banks, ABS are the only avenue through which banks can move large volumes of delinquent credit card debt off their balance sheet. Over the last couple of years, ABS have primarily been used to dispose of credit card rather than corporate NPLs (see Figure 4), a trend that we flagged in our April report, and one that has since only gained momentum.
Figure 4. Plastic Disposals
NPL ABS have come to be used primarily as a tool for disposing of delinquent credit card debt.
Source: NPL ABS prospectuses.
“Have You Seen This Deadbeat?”
If a debt collector fails to recover a loan, the bank’s final recourse is to take the borrower to court. But as an intermediate step it will sometimes try to shame the borrower into repaying the loans by disclosing his or her information publicly. It appears that Shanghai Pudong Development Bank was the first to take such an approach. In 2015 it published the names, partial identification number, residential address, and the size of the outstanding debt of 1,200 of what it called “deadbeat” (老赖) borrowers. It then asked the public to help provide it with up-to-date contact information on borrowers it had lost touch with, and promising a reward of up to 5,000 yuan if the information resulted in a loan being repaid. The bank called it quanmin cuishou dahuizhan (全民催收大会战), or “the people’s recovery battle.” It was met with widespread opprobrium and the bank withdrew the notice. Since then, however, the publication of delinquent debtors’ identity has become a widespread phenomenon, although banks no longer seek to enlist the public’s aid.
The banks often frame such action as a final measure before suing. The Shandong branch of the CCB, for example, said that if the debtor hadn’t made contact within five days of the notice being published, the bank would take the issue to court.
While the NPL ratio of credit card debt is relatively low, the pace at which credit card loans have risen as a share of total loans means that the overall volume of delinquent credit card loans has risen sharply. To keep them in check, banks have embraced both ABS and the outsourcing of debt collection.
As the economy slows, overdue credit card debt will likely rise, creating a source of financial anxiety for many Chinese families that they haven’t had to deal with before. That will expose holes in the existing regulatory regime. It may also lead the government to better protect the interests of household borrowers. Until then, it will fall to the banks to balance their need to recover bad loans while setting the standard for fair and transparent debt collection.
Special thanks to Joe Zhang, vice chairman of Hunan Yong Xiong Asset Management Group, a Changsha-based debt collection company, for his insights.
 It’s important to note that the recovery rate on credit cards is far lower than for other types of debt. Of the NPL ABS issued in 2018, those that were backed by delinquent credit card debt typically promised a recovery rate of less than 16%. In contrast, those packaged with mortgages forecast cash recovery of between 50% and 90%, and those with corporate loans a recovery rate of between 50% and 60%. With no collateral to claim, banks engage debt collection firms to recover what they can from credit card holders.
 ‘China Financial Stability Report 2018,’ People’s Bank of China, pg. 44, November 2, 2018 http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3656006/index.html.
 Tian Jiao, ‘不良贷款两万亿 揭30万催收员“不要债”真相’ (2 Trillions yuan of NPLs – To Truth of 300,00 Debt Collectors), jrzj.com, July 9, 2017 https://www.jrzj.com/190017.html. The figure is from a report cited in the Chinese press that was put together by a eight major debt collection agencies that formed a working group under the Investment Association of China (http://www.iac.org.cn).
 Sun Tianqi, Extract from “金融业行为监管与消费者保护”(Financial Sector Supervision and Consumer Protection), reprinted in Caixin, January 17, 2018 http://xyycs.chinadevelopment.com.cn/cshy/llyj/2018/0117/1224848.shtml. At the time the paper was written, Sun Tianqi was the deputy director of the PBOC’s department of consumer rights protection.
 Emily Feng, ‘China ‘Granny Gang’ Jailed in Lending Crackdown,’ Financial Times, August 10, 2017 https://www.ft.com/content/34ad1c98-7cd1-11e7-9108-edda0bcbc928.
 Shu Zhang, ‘After a Spate of Suicides, China Target Predatory Lending,’ Reuters, September 27, 2017 https://www.reuters.com/article/us-china-debt-campus-insight/after-spate-of-suicides-china-targets-predatory-student-lending-idUSKCN1C13BO?utm.
 Sun Tianqi, Extract from “金融业行为监管与消费者保护” (Financial Sector Supervision and Consumer Protection), reprinted in Caixin, January 17, 2018 http://xyycs.chinadevelopment.com.cn/cshy/llyj/2018/0117/1224848.shtml. At the time the paper was written, Sun Tianqi was the deputy director of the PBOC’s department of consumer rights protection.
 ‘关于印发《深圳市网络借贷信息中介机构催收行为规范》（征求意见稿）的通知, (Concerning ‘Rules for Debt Collection by Shenzhen Internet Loan Information Intermediary Institutions,’ (Draft) Notice), Shenzhen Internet Finance Association, May 4, 2017 http://www.szifa.org.cn/news_view.aspx?TypeId=4&Id=709&Fid=t2:4:2.
 ‘中国银监会关于进一步规范信用卡业务的通知’ (CBRC Notice on Further Standardizing Credit Card Operations), China Banking Regulatory Commission, June 23, 2009 http://www.cbrc.gov.cn/govView_57673CBD37A849478CF1DE393A905B4A.html. The original quote reads: “对因催收外包管理不力，造成催收外包机构损害欠款人或其他相关人合法权益的，银行业金融机构承担相应的外包风险管理责任。”
 ‘商业银行信用卡业务监督管理办法’ (Commercial Bank Credit Card Operations Supervision and Management Measures), China Banking Regulatory Commission, January 13, 2011 http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/201101279A711BED20E5B851FF254B0B042A2E00.html.
 LinkedIn post by Joe Zhang, Vice Chairman of Hunan Yong Xiong Asset Management Group, a Changsha-based debt collection company https://www.linkedin.com/feed/update/urn:li:activity:6491158198903508992.
 ‘财政部、人民银行、银监会关于国有商业银行股改过程中个人不良贷款处置有关问题的通知’ (Notice of the Ministry of Finance, People’s Bank of China, China Banking Regulatory Commission about Some Issues concerning the Disposal of Bad Personal Loans during the Course of the Stock Reform of State-owned Commercial Banks), Ministry of Finance, November 10, 2005 http://www.mof.gov.cn/zhengwuxinxi/caizhengwengao/caizhengbuwengao2005/caizhengbuwengao200511/200805/t20080525_42838.html.
 Li Haixia, ‘政协委员赵宇梓：建议减免国有银行信用卡欠款利息’ (CPPCC Member Zhao Yuzi: Suggests Reducing Interest on State Bank’s Credit Card Debts), People’s Daily, March 3, 2017 http://money.people.com.cn/bank/n1/2017/0303/c202331-29122308.html.
 ‘财政部、人民银行、银监会关于国有商业银行股改过程中个人不良贷款处置有关问题的通知’ (‘Notice of the Ministry of Finance, People’s Bank of China, China Banking Regulatory Commission about Some Issues concerning the Disposal of Bad Personal Loans during the Course of the Stock Reform of State-owned Commercial Banks’), Ministry of Finance, November 10, 2005 http://www.mof.gov.cn/zhengwuxinxi/caizhengwengao/caizhengbuwengao2005/caizhengbuwengao200511/200805/t20080525_42838.html.
The relevant passage is as follows: “银行和金融资产管理公司(以下简称“资产公司”)应依法对个人贷款进行全额追偿，不得采取打包出售、打折减免等方式处置。对符合《财政部关于印发＜金融企业呆账核销管理办法＞的通知》(财金50号)有关呆账核销条件的，在核销后应实行账销案存，继续保留追索权利.”
Translation from lawinfochina.com:
“All banks and financial asset management companies (hereinafter referred to as the “asset companies”) shall demand full-amount repayments for individual loans. None of them may dispose of individual loans by pack-selling, discount or otherwise. For the individual loans that meet the requirements for the write-off of bad loans of financial enterprises as prescribed in the Notice of the Ministry of Finance (No. 50  of the Ministry of Finance), the records of written-off accounts for the bad loans shall be preserved and the right to demand the repayments for the bad loans shall remain.” http://www.lawinfochina.com/display.aspx?lib=law&id=4932&CGid=
 ‘政协委员赵宇梓：建议赋予商业银行更多核销自主权’ (CPPCC Member Zhao Yuzi: Suggests that Commercial Banks Be Given More Autonomy to Write-off Loans), Zhang Han, Finance China, March 2, 2017 http://finance.china.com.cn//news/special/2017lianghuifinance/20170303/4122163.shtml.
 ‘浦发银行再发“催收令”在官网公示1200名“老赖”名单’ (Shanghai Pudong Development Bank Publishes ‘Collection Order’ On Official Website With List Of 1200 ‘Deadbeats’), Southern Weekend(Reproduced on Shanghai Pudong Development Bank’s website), July 11, 2018 http://news.spdb.com.cn/about_spd/media/201807/t20180711_363360.shtml; and, Wuhong Yuran,‘客户失联 浦发打响信用卡“全民催收大会战”’(After losing contact with customers, Shanghai Pudong Development Bank Calls for a ‘People’s Collection War’), Caixin, April 9, 2015 http://finance.caixin.com/2015-04-09/100798626.html.