- With mortgage boycotts signalling a loss of confidence in China’s property sector, banks are under pressure to help developers deliver on promised homes
- However, the quality of the collateral that secures loans to developers is a broader concern, even as the economy struggles to reboot under strict zero-Covid measures
Fears about China Evergrande Group, the world’s most indebted property developer, spiralling into default now seem a distant memory.
The months-long financial drama that culminated in the company being labelled a defaulter in December 2021 unleashed a wave of distress that has spread to some of China’s largest and most creditworthy developers.
While defaults in the nation’s offshore dollar-denominated debt market rose to US$14 billion last year, they have reached a staggering US$37.3 billion this year, data from Bloomberg shows. New house prices in 70 cities have fallen for 11 straight months, while sales among the top 100 developers have contracted on an annual basis for 12 successive months.
In a sign of the severity of the loss of confidence in China’s property market, tens of thousands of borrowers have halted mortgage payments on housing projects that sit unfinished. According to Nomura, developers only delivered 60 per cent of the flats they pre-sold between 2013 and 2020. Not only is the presales model – which dominates the residential market – broken, the threat of social instability and a sharper deterioration in asset quality in the banking sector has become more acute.
In a report published on August 18, S&P Global Ratings said the mortgage boycotts are “not only a social stability risk. Should the strikes become widespread, they could undermine financial stability, particularly if they cause a sharp decline in home prices.” The property crisis is escalating just as Beijing doggedly pursues its uncompromising zero-tolerance approach to the Covid-19 virus, imposing citywide lockdowns that undermine the effectiveness of measures to stimulate the economy.
China’s downturn leaves the country’s banks stuck between a rock and a hard place. The mortgage strikes have prompted a more forceful policy response. Banks are being leaned on by the government to provide the bulk of the funding to jump-start and complete stalled residential projects.
Yet, while helping restore confidence in the real estate market is in banks’ interest – the number of distressed developers targeted by the strikes could rise significantly, increasing the hit to banks’ mortgage books – lenders have been reducing their exposure to the sector, especially since Beijing launched measures in 2020 to rein in developers’ debt.
In early 2019, lending to housebuilders was growing 20 per cent year on year. This dropped to less than 5 per cent by December 2020, data from Moody’s Investors Service shows. What is more, corporate loans to the property sector were the main source of new non-performing loans last year, with smaller regional banks facing much higher credit risks than their nationwide peers.
Homebuyers at the sales centre for a residential project in Chongqing in March 2019. Photo: Zheng Yangpeng
Poor corporate governance and risk controls, coupled with less diversified loan books, make regional banks more prone to lending to vulnerable developers, particularly in smaller cities where most of the unfinished developments are located.
