Amid a bleak labor market and protracted property slump, consumer loan defaults have soared to record highs in China, and analysts expect the situation to worsen as lower-income ​Chinese in particular sink deeper into debt. The surge in bad debt is mainly the result of ​last year’s relaxed credit issuance to meet government consumption targets, said bankers with knowledge of the matter. It comes with Beijing actively encouraging consumers to borrow and spend as part of a years-long effort to pivot the stuttering, two-speed economic recovery ​towards domestic demand: While industrial production remains strong, retail sales have slumped.

The People’s Bank of China has repeatedly urged commercial banks to step up lending, in an effort to drive growth through borrowing-fueled consumption. But the banks have balked, instead tightening lending standards to protect themselves from ​additional bad debt. A major component of the conundrum is that, for the most part, only those with bad credit are looking to borrow, with more worthy borrowers increasingly staying away from buying on credit.

Full report: China’s record consumer defaults undermine Beijing’s push to boost spending.