Is China stumbling on its own subprime mortgage crisis?


It is spreading like wildfire. Homebuyers in China are refusing to pay the mortgage on the properties they have purchased but their cash-strapped developers cannot finish. Some say they will only resume payments when construction resumes.

The protest included more than 100 projects postponed as of July 13, up from 58 projects just a day earlier. Frustrated buyers accuse developers of misusing sales proceeds and banks of failing to protect their loans.

China has never seen anything like this before. As in the United States – until the 2007 mortgage crisis – the possibility of problems in the mortgage market was very small.

But this mortgage strike is completely unpredictable. Homebuyers have every reason to be angry. Most of the projects were started by developers who defaulted on their payments. China Evergrande Group led the group, accounting for an estimated 35% of all projects that faced mortgage revolutions, according to data compiled by CLSA. One such project was launched in eastern Jiangsu province before the Covid-19 pandemic. Construction has been suspended since last August, while property values ​​in the neighborhood have fallen by about 10%.

In other words, the affected families not only saw their wealth decline, but they could not move and enjoy their new apartments either. Over the years, with the approval of local governments, the likes of Evergrande and Country Garden Holdings have fueled the residential housing boom through what’s called a pre-sale model: apartments are bought long before they’re even completed. Now the builders do not have the money to finish these projects.

To be sure, developers’ debt problems have been met with protests in the past, from suppliers and employees, right up to the hapless retail investors who bought into their wealth management offerings. But this new development is something completely different. It opens Pandora’s box and poses a direct threat to the stability of Chinese banks. The Department of Housing and Urban and Rural Development met with financial regulators and major banks this week to discuss a mortgage boycott, Bloomberg News reported Thursday.

Unless the government of President Xi Jinping stops this scramble, the collapse of the banking system at the level of Lehman Brothers Holdings in 2008 is very imminent. China is not ready for a large part of its bank loans to be spoiled.

According to Autonomous Research, banks have about 62 trillion yuan ($9.2 trillion) of exposure to the real estate sector. More than half is in the form of mortgage loans. At China Construction Bank Corp. One of the world’s largest banks, mortgage loans account for more than 20% of its total assets.

Until this week, China’s middle class had been prime customers, loyally paying their monthly bills. The government’s social credit system – the national credit rating and borrowing blacklist – has worked well. Even bad credit can hinder one’s ability to walk the high speed rails. But what if some are tired and ready to give up their obligations?

We’re not talking about one or two developers who are in arrears. Last year, 28 of the top 100 developers defaulted or required notebook owners for extensions, data collected by CLSA shows. Collectively, they account for about 20% of all real estate sales in China. Even the money is tighter now. In the first half, real estate sales fell 72% from a year ago, further eroding cash flow.

CLSA’s monthly survey of the current status of Evergrande projects gives us a glimpse into the number of unfinished sites located across China. As of June, more than half of Evergrande’s projects were under construction. The broker believes that about 840 billion yuan of mortgages are tied to abandoned sites across China.

It’s worth asking how we got to this point, especially for a government obsessed with stability.

All we’ve seen is the inertia of politics. Developers have been struggling for over a year now, but no progress has been made in restructuring their finances. Local officials were unwilling to make tough decisions, write off bad debts, and come up with solutions. Unable to get rid of financial burdens, builders cannot focus on operations. They become zombies, and their construction sites turn into ghost towns.

In 2008, I worked at Lehman Brothers in New York and witnessed first-hand how the subprime mortgage crisis led to the collapse of the venerable bank – and threatened the entire industry. This environment is starting to feel eerily similar.

More from this writer and others at Bloomberg Opinion:

• Why the property crisis is spreading in China: Chuli Ren

• The failure of China’s small banks points to a big problem: Trivedi and Ren

China’s central bank needs a bigger leader: Ren and Trivedi

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Shuli Ren is a columnist for Bloomberg Opinion covering the Asian markets. She was a former investment banker, and works as a markets reporter at Barron’s. She is CFA certified.

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