Property protests in China threaten to cut $220 billion in bank mortgages

FILE PHOTO: A ship passes some of the 39 buildings developed by China Evergrande Group for which authorities have issued a demolition order, on the man-made Ocean Flower Island in Danzhou, Hainan province, China January 7, 2022. REUTERS /Aly Song/Photo File

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HONG KONG, July 14 (Reuters) – Chinese banks are set to deal a blow to the asset quality of the mortgage business as a growing number of homebuyers threaten to halt loan repayments in protest against unfinished apartments, analysts said.

Bad mortgage ratios for banks could rise three to five times as homebuyers stop mortgage payments, analysts say, adding that the protests will significantly increase lenders’ exposure to sector risk cash-strapped real estate.

China’s widening homebuyer protest adds to the woes of the country’s property sector, which accounts for a quarter of the economy, and banks that were rocked last year by a series of defaulting developers. their obligations.

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Chinese investors dumped banking and real estate stocks on Thursday, fearing that worsening problems in the real estate sector would start to hit the financial system. The CSI300 Bank Index (.CSI000951) fell 3.3%.

Up to 1.5 trillion yuan ($220 billion) in mortgages are tied to unfinished residential projects in China, ANZ said in a report. That could come under threat if the protest by homebuyers, currently focused on cities in central China, expands.

Developers involved in the unfinished projects include China Evergrande Group (3333.HK) and cash-strapped Sinic Holdings (2103.HK), according to analysts and media reports.

Evergrande declined to comment. Sinic did not immediately respond to request for comment.

Chinese authorities have held emergency meetings with banks after raising concerns that a growing number of buyers are refusing to pay mortgages on stalled projects, Bloomberg reported Thursday, citing people familiar with the matter.

“A major concern is whether this snub is spreading too quickly and more homebuyers are following suit just because their projects are moving slowly, or simply because of a gloomy outlook for the real estate industry,” said Shujin Chen. , equity analyst at Jefferies.

Although the banks hold the pre-sold apartments as collateral, they would likely suffer a loss as the assets are not completed. Waiting for completion could put banks at risk of a substantial decline in property values.

“It is difficult to sell the apartments under the current market conditions. Also, if there is a massive wave of real estate auctions, prices will fall,” said Xiaoxi Zhang, Chinese financial analyst at Chinese research group Gavekal. Dragonomics.

A fund manager also said banks would not recover any capital if they seized unfinished assets.

“It’s going to wipe out half of the bank’s existing equity; it’s worse than subprime,” he said, referring to the subprime mortgage crisis in the United States that began in 2007. The fund manager asked not to be named, due to the sensitivity of the issue. .

The four major state-owned banks, along with China Postal Savings Bank, China Merchants Bank (600036.SS) and Industrial Bank (601166.SS), are the financial institutions most exposed to mortgages, according to Jefferies.

Banks including the Agricultural Bank of China (601288.SS), Construction Bank of China (601939.SS) and Industrial Bank said on Thursday their mortgage books tied to unfinished or delayed real estate projects were relatively weak and that the risk was controllable.

Industrial and Commercial Bank of China Ltd (601398.SS), Bank of China (601988.SS), Postal Savings Bank of China and China Merchants did not immediately respond to Reuters requests for comment.

Equity market participants said authorities would need to intervene early to resolve the crisis, as struggling property developers would likely be unable to resume construction in the near term due to their cash crunch.

“Both social stability and financial stability will be threatened in the worst case scenario,” said Zhang of Gavekal Dragonomics.

($1 = 6.7332 Chinese yuan renminbi)

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Reporting by Clare Jim and Xie Yu; Additional reporting by Samuel Shen in Shanghai; Editing by Sumeet Chatterjee

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