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The mortgagors′ revolt that has swept through China in recent weeks shouldn’t by itself trigger a banking crisis but it is another symptom of the cancer that is eroding one of the pillars of China’s economy.
What started as a boycott of loan repayments by a handful of homeowners frustrated at having paid for apartments that haven’t been completed has spread rapidly over the past week to the buyers of more than 300 property developments across China.
The inability of Beijing to stabilise the property sector comes at inopportune time with Xi Jinping looking to seal an unprecedented third term later this year.Credit:AP
China’s authorities are clearly concerned that the boycott movement will continue to expand. They’ve censored references to the boycotts online, floated the possibility of awarding grace periods for borrowers with uncompleted properties, told banks to provide more funding for developers and are themselves setting up a ¥300 billion ($64 billion) fund to help the developers complete unfinished projects.
The reason for the angst and anger of the homeowners is obvious. The property industry in China operates on a pre-sales model – the buyers pay for their properties, putting down a deposit and borrowing the rest, before construction starts.
That’s obviously fine when property prices are continuously rising, as they have done for decades in China. It is, however, a recipe for disaster and distress for the homeowners that threatens losses for their banks if they start falling, as they have done for much of the past year.
The scale of the issue is manageable for the banks, although some smaller regional banks might struggle to cope if there is a wave of defaults.
It is estimated loans to the owners of uncompleted developments (and some that haven’t even started construction) are only about one per cent of all China’s mortgage loans and that if all defaulted the losses would be measured in the tens, rather than hundreds, of billions of Australian dollars.
There is, however, the spectre of contagion. Already the protests by homebuyers are starting to be mirrored elsewhere, with suppliers to some of the projects refusing to pay their own bank loans because they haven’t been paid by developers.
Among those developers is China Evergrande, the world’s most indebted property developer, with about $US300 billion ($430 billion) of liabilities, and the company whose default on its offshore bonds last year brought home the scale of the crisis in China’s property sector.
Its suppliers want it to be made responsible for their loans, which might be problematic given that the group has yet to come up with a workable restructuring plan and is at risk of being declared in default of repayments of its onshore bonds by domestic investors that have, until very recently been prepared to extend grace periods.
Evergrande has until the end of this month to produce its plan and avert what would be a landmark default in China.
Borrowers for incomplete apartment developments in China are refusing to make payments on their debts, exacerbating the existing crisis within China’s vital property sector.Credit:Bloomberg
Its ability to meet that deadline is complicated by the forced resignations of its chief executive and chief financial officer last week after an investigation of the circumstances in which about $US2 billion of deposits within an Evergrande subsidiary were used as security for borrowings by third parties, some of which haven’t repaid the funds.
The crisis in the property sector, a sector that accounts for about 30 per cent of China’s GDP, is one of China’s own making.
It was Beijing’s decision to crack down on leverage in the sector with its “three red lines” policy dictating limits on developers’ debt ratios that precipitated a crisis which saw about 30 of China’s top 100 developers default on their offshore borrowings. More have defaulted this year.
Despite the authorities’ efforts to encourage restructuring, and their urging of banks and local governments to provide funds to stabilise the sector and re-start developments activity levels have fallen dramatically. This month property sales are tracking more than 40 per cent below their level at this time last year.
Given the central role property has played in China’s economy and the coincidence of the property crisis with lockdowns flowing from China “zero COVID” policies, it perhaps isn’t surprising that China’s GDP growth slumped to a meagre 0.4 per cent in the second quarter.
The risk for the authorities is contagion, and not just from the ’ boycotts or even the spread of that movement to supplier to the developers.
Evergrande’s default on its offshore bonds last year brought home the scale of the crisis in China’s property sector.Credit:Bloomberg
While the losses stemming from in complete or not-yet-commenced developments might be containable, the chilling effect those projects, the shrinkage of new development activity in the sector, the falling property prices and COVID-related losses of many borrowers’ incomes will have on the attitude of existing and prospective homeowners and investors could generate a destructive cycle that sparks a full-scale property and banking crisis.
China’s authorities do, of course, have a lot more levers they can pull to avert crises than their more democratic counterparts.
The silencing of discussion about the ’ boycotts is an example of one lever, the directions to banks and local governments and the creation of a bail-out fund to assist the developers another.
The authorities can, and almost certainly have, instructed domestic lenders to developers to show forbearance to distressed developers.
If those lenders were to lose patience (or their own financial capacity to continue to defer repayments is exhausted) and an Evergrande were to default on its onshore bonds, it would create a dangerous moment for the authorities.
There is a risk that the (unusual for China) actions of the and suppliers, coming not long after depositors at a number of rural banks tried earlier this month to protest the freezing of their deposits since April (protests that ended when they were assaulted by plainclothes police) could turn into a wider backlash against the losses of wealth occurring as property values slide.
With property accounting for nearly 80 per cent of Chinese household wealth, the inability of the authorities to stabilise the sector threatens domestic spending, economic growth and social unrest in a year where the authorities were supposed to be focused on stability in the lead up to Xi Jinping’s unprecedented “election” to a third term as party president and supreme leader later this year.
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