Personal bankruptcy law needed in China’s growing credit card society

With the huge availability and take-up of consumer credit in China over the past five years, new legislation for consumer bankruptcy is necessary, argues Huifen YIN in an interview with Stacey Steele

SS: Many people would be surprised to know China does not have a personal bankruptcy law. Why is there such a gap in China’s legislative regime?

HY: Yes, it’s true. China’s Enterprise Bankruptcy Law (EBL) became effective in 2007, but it does not apply to non-commercial corporations and individuals. Debates about introducing a personal bankruptcy procedure have been around since the 1990s, but reformers were not convinced of the need for legislation when the EBL was introduced and many people were concerned that debtors would somehow abuse the proceeding.

SS: You argued at the INSOL International Conference in Sydney recently that most commentators in China now accept that a personal bankruptcy law is needed. What’s changed?

Huifen Yin says there is now consensus in China that a proceeding dealing with personal bankruptcy for individuals involved in commerce is necessary.

HY: The key concern about abuse of any new proceeding remains, but there is now consensus in China that a proceeding dealing with personal bankruptcy for individuals involved in commerce is necessary for the ongoing stability of the economy. Consensus does not extend to whether such a procedure should apply to consumer bankruptcy, however.

SS: But from our discussions, I understand that you are in the camp that believes a consumer bankruptcy law is now necessary in China.

HY: There have been stunning advances in the availability and take-up of consumer credit in China over the last five years that make new legislation for consumer bankruptcy necessary. China’s contemporary consumer credit industry began in the late 1980s with the Bank of China issuing the first credit card in Zhuhai in 1985, and the China Construction Bank issuing its first residential mortgage loan in 1987. According to statistics from the People’s Bank of China (PBOC), the volume of consumer credit increased from CNY3.7 trillion in 2008 to CNY18.9 trillion in 2015. The rate of increase has slowed and stabilised since 2011, but the volume of consumer credit is still increasing about 20 to 25 per cent a year. These statistics alone require us to think about the consequences for consumers who cannot repay their debts in a more systematic manner.

The number of credit cards in China increased by 16.5 per cent from 2013 to 2014, with 455 million new cards in 2014. And there is still much more room for growth

SS: Credit card debt has caused concerns about consumer solvency in other jurisdictions. Do many people have credit cards in China today?

HY: Yes, increasingly Chinese people have more than one credit card. PBOC statistics show that the number of credit cards in China increased by 16.5 per cent from 2013 to 2014, with 455 million new cards in 2014. And there is still much more room for growth. At the end of 2014, the number of credit cards per capita reached 0.3, with the figures in Beijing and Shanghai suggesting that on average each person had 1.7 and 1.3 cards respectively. Given the popularity of cards in these key cities, the potential for further growth across China is very high. Also, the amount of the lines of credit has also increased substantially—from CNY2 trillion in 2010 to 5.6 trillion in 2014, according to the PBOC.

SS: While the data you refer to suggests a new procedure is necessary, do you think a new consumer bankruptcy procedure is feasible?

HY: Yes, I think a new consumer bankruptcy procedure is possible for a number of reasons. First, attitudes towards installment consumption are changing. Many young people want to use credit to buy cars, houses and electronic devices, for example. Many leading online businesses now offer installment payments and consumers are developing credit-based consumption habits.

Second, the Chinese government supports the reorientation of the national economy from a product focus to a consumption focus. Consumption’s contribution to China’s national economic growth rate reached 66.4 per cent in 2015 according to the National Statistics Bureau of China

The level of over-indebtedness of households makes it difficult to deny that a consumer procedure is needed. Debt-to-income ratios and debt-to-assets ratios have become very high in China

Third, the level of over-indebtedness of households makes it difficult to deny that a consumer procedure is needed. Debt-to-income ratios and debt-to-assets ratios have become very high in China. Further, the danger that many debtors may not be able to repay all of their debts fully and on time will become particularly acute if there is a downturn in real estate prices in China: most household asset wealth is based on the value of property holdings.

Fourth, China has established credit reporting systems which will mitigate the risk of malicious filings by debtors. The PBOC’s Credit Information Bureau was established in November 2003 and is mainly responsible for collating personal credit information and credit management. In 2006, a personal credit database was built and the official national network came into operation. At the end of 2015, the credit system included 885 million individuals, and about 21 million enterprises and other organisations.

SS: I understand that existing law in China gives creditors avenues to pursue recalcitrant debtors.

HY: According to the Chinese Civil Code, if a debtor is temporarily unable to pay his or her debts, then the debtor may repay a debt by installments with the consent of the creditor or a People’s Court. Moreover, the law provides that if a person subjected to civil execution fails to fulfill their obligations, a People’s Court may, for example, sell all or part of that debtor’s assets by public auction to fulfil those obligations. The court must, however, leave the person with the necessities of life. In this way, the civil execution system operates to provide a debtor with what would typically be known as ‘exempt property’ in a traditional personal bankruptcy proceeding.

SS: The sorts of processes you describe sound like they could form a precedent for a future indigenous Chinese consumer bankruptcy law procedure. Are there any other concepts, based on existing concepts, that non-Chinese readers might recognise as contributing to a new consumer bankruptcy proceeding?

HY: Yes. The courts have placed limits on debtors who do not fulfil their obligations by denying them so-called ‘high consumption’. High consumption in this context may include catching planes, playing golf or purchasing real estate and other non-essential consuming behavior. These limitations may be seen as similar in some ways to bankruptcy disqualification frameworks that exist in other jurisdictions.

SS: It sounds like a lot of thought has already gone into what a Chinese consumer bankruptcy procedure might focus on. When do you think such a new procedure might be introduced?

HY: There are many ideas in circulation. Shenzhen City, for example, has already created draft legislation which is being discussed domestically, and waiting for the legislative authorisation of the National People’s Congress. Once more consensus is gained and people realise the benefits and necessity of a collective proceeding, I believe a new procedure will finally be introduced.

This post reflects the personal opinions of the authors. Statements do not represent the views or policies of employers, past or present, or any other organisation with which they are affiliated.

Huifen Yin is an associate professor of Shanghai University of Political Science and Law. Stacey Steele is an associate professor at the Melbourne Law School, University of Melbourne.

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ifc Apple store in Shanghai: The volume of consumer credit in China is increasing by about 20 to 25 per cent a year. Photo: Wikimedia Commons

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