Chinese banks’ half-truths make it hard to fix mortgages
To curb systemic risk, the situation of an important part of the loan portfolio must be clarified
A rare mortgage boycott is exposing the problem of Chinese banks’ half-truths about asset quality. 17 of them say buyers’ refusal to pay installments is not a cause for concern, but the damage could double the delinquency rate, which is already underreported. To curb systemic risk, it is necessary to clarify the situation of an important and traditionally safe part of the loan portfolio.
The number of homebuyers who have defaulted on their mortgages has multiplied to encompass more than 300 projects in at least 50 cities. They have waited an average of 16 months in vain for developers – many of them hard-pressed by regulatory measures – to hand over the apartments, according to consultancy E-house.
Lenders, from the big four to those in small towns, play down. The country’s retail banking king, the €136bn China Merchants Bank, says bad loans stemming from unspecified “internet-mentioned projects” amount to just €1.7m, or less than 0.001% of its assets. total mortgages.
Private indicators are more alarming. Guangfa Securities estimates that around 5% of projects, measured by acreage, have stalled, translating to around €300bn in mortgages, or 1% of total bank loans as of June. This is a substantial step compared to the existing delinquency rate, which stands at 1.8%. This damage assessment is also probably conservative, considering that some buyers took out loans for down payments and that the crisis is just beginning.
Official warnings from 2020 that real estate was a gray rhinoceros, a highly likely and high-impact but neglected threat, are more apt than ever. Despite regulatory efforts to curb exposure, real estate loans, made up mostly of individual mortgages, account for about 27% of all outstanding loans. And official guarantees are not helping to ease concerns this time: The CSI index of mainland Chinese banks is down 5% in a week, and the China Merchants Bank is down 14% this month, even after the regulators request lenders to meet the financing needs of developers where reasonable. Chinese commercial banks already have an abnormally high bad loan coverage ratio of over 200%, according to the official mandate, underscoring a lack of confidence in the system. S&P Global’s own adjusted estimate, published in June, places the global delinquency ratio at 6.5% for 2022.
Knowing the true scale of the problem is critical to averting broader risks, while ensuring that banks are well capitalized and in a position to lend to the rest of China’s faltering economy. Sweeping mortgage problems under the rug does the opposite.
Faith of errors
A rare mortgage boycott is exposing the problem of Chinese banks’ half-truths about asset quality. 17 of them say buyers’ refusal to pay installments is not a cause for concern, but the damage could double the delinquency rate, which is already underreported. To curb systemic risk, it is necessary to clarify the situation of an important and traditionally safe part of the loan portfolio.
The number of homebuyers who have defaulted on their mortgages has multiplied to encompass more than 300 projects in at least 50 cities. They have waited an average of 16 months in vain for developers – many of them hard-pressed by regulatory measures – to hand over the apartments, according to consultancy E-house.
Lenders, from the big four to those in small towns, play down. The country’s retail banking king, the €136bn China Merchants Bank, says bad loans stemming from unspecified “internet-mentioned projects” amount to just €1.7m, or less than 0.001% of its assets. total mortgages.
Private indicators are more alarming. Guangfa Securities estimates that around 5% of projects, measured by acreage, have stalled, translating to around €300bn in mortgages, or 1% of total bank loans as of June. This is a substantial step compared to the existing delinquency rate, which stands at 1.8%. This damage assessment is also probably conservative, considering that some buyers took out loans for down payments and that the crisis is just beginning.
Official warnings from 2020 that real estate was a gray rhinoceros, a highly likely and high-impact but neglected threat, are more apt than ever. Despite regulatory efforts to curb exposure, real estate loans, made up mostly of individual mortgages, account for about 27% of all outstanding loans. And official guarantees are not helping to ease concerns this time: The CSI index of mainland Chinese banks is down 5% in a week, and the China Merchants Bank is down 14% this month, even after the regulators request lenders to meet the financing needs of developers where reasonable. Chinese commercial banks already have an abnormally high bad loan coverage ratio of over 200%, according to the official mandate, underscoring a lack of confidence in the system. S&P Global’s own adjusted estimate, published in June, places the global delinquency ratio at 6.5% for 2022.
Knowing the true scale of the problem is critical to averting broader risks, while ensuring that banks are well capitalized and in a position to lend to the rest of China’s faltering economy. Sweeping mortgage problems under the rug does the opposite.
