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Chinese banks fear for US$646 billion, is the real estate bubble bursting?

RIO DE JANEIRO, BRAZIL – Mounting signs of stress this week in an industry that accounts for about a quarter of the world’s second-largest economy have roiled China’s credit markets, dragged down the nation’s bank stocks, and pummeled commodities from iron ore to copper.

Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, according to researcher China Real Estate Information Corp. That’s up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts, including Shujin Chen.

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This is increasingly putting Chinese banks in a precarious position. A vast real estate bubble is in danger of bursting.

Former UBS Group economist Jonathan Anderson once called it “the most important sector in the universe.”

Over a decade later, Chinese property is again grabbing the attention of global investors—this time for all the wrong reasons.

Recent reports do not bode well for the Chinese financial industry. For example, property buyers have stopped making mortgage payments on at least 100 projects in more than 50 cities, according to China Central Television (CCTV) on its WeChat page, citing China Real Estate Information Corp.

According to Bloomberg, there is now a sort of “grassroots movement” in the People’s Republic to boycott mortgage payments.

The boycotts increase the risk of mortgage defaults and pose a new challenge to banks, which their exposure to ailing developers has already squeezed.

Mortgages account for nearly 20 percent of outstanding bank loans and about 39 trillion yuan (about 5.73 trillion dollars). This is a sum too large even for the Chinese government to bail out the affected banks.

Banks are rushing to reassure investors that risks from loans to homebuyers are controllable, with at least ten firms issuing statements. State-owned Agricultural Bank of China Ltd. said it held 660 million yuan of overdue loans on unfinished homes. In contrast, smaller rival Industrial Bank Co. said 1.6 billion yuan of mortgages were impacted, of which 384 million yuan have become delinquent.

According to estimates, about 4.4 trillion yuan (646 billion dollars) are directly affected by the boycott measures, mainly affecting projects that started from the end of 2020 to March 2022 but have been delayed or had their construction postponed.

But a default there would put the country’s construction industry and financial sector in dire straits. The latter are already struggling with the Evergrande crisis, which is still a significant burden.

Housing in China has gone from being a sure bet over the past two decades to a growing risk. Home sales tumbled 41.7 percent in May from a year earlier, with investment dropping 7.8 percent. The government cracked down on leverage in the real estate industry, helping drive up debt refinancing costs for developers and triggering a record wave of defaults.

The real estate industry has an oversized impact on the economy. When related sectors like construction and property services are included, real estate accounts for more than a quarter of Chinese economic output, by some estimates.

About 70 percent of household wealth is stored in the property, along with 30 percent-40 percent of bank loan books. Land sales account for 30 percent-40 percent of local government revenues, according to Pantheon Macroeconomics’ Botham.

Above all, one should not forget the external impact: Many Chinese construction groups have foreign investors (including from the United States and Europe) who will also have to take massive write-downs in the event of a collapse.

But that is far from all. If this bubble were to burst and bring the People’s Republic to the brink of financial collapse, the geopolitical repercussions would probably be enormous. The communist leadership in Beijing could take this as an opportunity to invade Taiwan to unite the population behind them. Just a thought.


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