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China wants households to spend more, yet its banks are becoming less willing to lend to them. Consumer credit fell sharply in 2026 even as the government subsidised lower interest rates on loans for cars, home improvements and other large purchases. The contradiction points to a deeper problem: borrowers are growing riskier just as lenders are finding it harder to recover money from those who default.

The retreat matters because stronger household consumption is central to China’s effort to rely less on property investment, infrastructure and exports. Policies meant to make borrowing cheaper cannot revive spending if banks respond by rejecting more applicants. Protecting debtors from abusive collection practices is also necessary, but without a workable system for resolving bad debts, the reform may further restrict credit for the very households the government wants to encourage.

The borrowing slump is broader than housing

Short-term consumer loans in China were 8.3% lower in September than a year earlier, the steepest fall on record. In August the stock of such loans reached its lowest level since the country’s severe zero-covid lockdowns. Spending during the early-October public holiday also disappointed: the typical traveller spent 2% less than during the comparable holiday in 2025.

Some of the decline in household borrowing is easy to explain. China’s prolonged property crash has reduced home sales and therefore demand for mortgages. Homeowners who can afford to do so are repaying mortgages early. After decades of growth, household debt stopped rising relative to the economy: it reached about 60% of GDP in 2020, remained flat for several years and then edged down. That is still below the rich-country average of just under 70%.

But the property bust does not explain why unsecured consumer lending is also shrinking. The finance ministry tried to stimulate demand by subsidising banks that offered lower rates on loans for big-ticket purchases. Instead of expanding credit, banks became more selective.

Cheap loans meet riskier borrowers

The banks’ caution reflects worsening credit quality. Gavekal, a consultancy, estimates that more than 10% of Chinese adults may have had unpaid debts in 2025, up from less than 8% a year earlier. Ordinarily, lenders would compensate for a higher chance of default by charging higher interest rates. The subsidy pushes rates in the opposite direction.

Banks are unlikely to reject government support openly, but accepting it can leave them underpaid for the risk they take. Their rational response is to screen out marginal applicants. Credit becomes cheaper for people who qualify while becoming unavailable to a larger group of people who might otherwise have borrowed at a higher rate.

The secondary market for troubled loans reinforces that caution. Banks often sell delinquent consumer debts to specialist investors, freeing space on their balance-sheets. Those investors buy the loans at a discount and try to collect more than they paid. In early 2021 overdue consumer loans sold for roughly 30% of their face value. By early 2026 the average price had collapsed to about 5%.

Such a steep discount suggests that a delinquent loan has become much harder to recover. It therefore raises the expected cost of every new consumer loan, especially one made to a borrower near the edge of eligibility.

A necessary crackdown has a financial side-effect

Debt collection in China has long operated with weak rules and frequent intimidation. Agencies have subjected borrowers and their relatives to hundreds of calls, disclosed private credit histories to employers or acquaintances, appeared at homes late at night and used fabricated obscene images as a form of coercion. The harassment has been linked to severe distress and deaths.

After pursuing especially abusive collectors through lawsuits, the authorities introduced national restrictions in August. Collectors may now call a debtor no more than six times a day, may not contact family and friends or make late-night home visits, and must record every interaction. These protections curb conduct that should never have been tolerated.

They may also help explain why bad debts now fetch so little. If collectors have fewer lawful ways to pressure borrowers, investors will expect to recover less and will pay banks less for delinquent loans. That makes banks even more reluctant to lend to customers who might default.

The lesson is not that China should restore abusive collection. It is that consumer stimulus, borrower protection and insolvency rules must fit together. Subsidised interest rates conceal risk rather than remove it, while humane collection rules need a credible legal route for restructuring or enforcing debts. Until that machinery improves, attempts to unlock household spending through cheaper credit may keep producing the opposite result: tighter lending, fewer borrowers and still-cautious consumers.