China banks told to bail out property developers as mortgage boycotts threaten economy

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The Guardian

Chinese banks have been told to bail out struggling property developers to help them complete unfinished housing projects and head off the growing mortgage strike that threatens to seriously damage the economy.

With thousands of homebuyers banding together to refuse to keep up with mortgage instalments on unfinished apartments bought off the plan, regulators have stepped up efforts to encourage lenders to extend loans to qualified real estate projects.

The China Banking and Insurance Regulatory Commission (CBIRC) told the official industry newspaper on Sunday that banks should meet developers’ financing needs where reasonable.

The CBIRC expressed confidence that with concerted efforts, “all the difficulties and problems will be properly solved”, the China Banking and Insurance News reported.

Chinese bank shares still rallied on Monday in wake of the regulator’s intervention and a belief that the government in Beijing will have enough policy measures at its disposal to control the situation.

However, it was not clear whether the banks would be able to absorb the cost of the mortgage strike, which is affecting an estimated 100 projects in 50 cities.

The value of the mortgages involved amounts to 2bn yuan ($300m), according to data from the banks on Friday, but some analysts think the real figure is much higher. GF Securities in Guangdong, for example, said that the amount could be 2tn yuan ($300bn).

The property sector in China, which accounts for up to 30% of economic output, has been in crisis since the slow collapse of the second biggest developer, Evergrande, began last year. Since then the toxic fallout from its default on a large part of its $300bn debt mountain has started to spread throughout the economy.

As the government’s zero-Covid policy continues to cripple activity and property sales continue to struggle, analysts at S&P issued a chilling warning on Monday that the writing was now on the wall for property companies facing bond payments totalling $88bn before the end of the year.

“The end of the beginning is at hand for China developer defaults,” S&P said. “In the first stage, firms asked investors to exchange or extend defaulted bonds, to buy some time until the property market recovers. In the next stage, we assume investors will lose patience for such deferrals, especially if home sales do not soon recover.”

If home sales do not pick up sufficiently, S&P said, up to one in five of the rated companies face going bust.

“Based on our sensitivity tests, at least one-fifth of rated Chinese developers could be insolvent. This assumes no refinancing, and that all pre-sold obligations are completed.”

In another note, the rating agency downgraded the Henan province-based developer Central China Real Estate to a B-minus rating as sales fell 55% in the first half of the year and household income also dipped amid the ongoing problems caused by successive Covid lockdowns.

It also noted that “a series of incidents in Henan” had “sparked homebuyers’ concerns over smooth delivery of pre-sold properties in the industry downcycle”, suggesting falling confidence in the industry after hundreds of savers demonstrated outside a bank in Henan in protest at not being able to access their accounts.

Mark Dong, Hong Kong-based co-founder and general manager of Minority Asset Management, said Beijing had the will to fix the crisis and expected state-owned developers to step in and acquire troubled projects from heavily indebted private peers, accelerating an industry consolidation.

The CBIRC had already vowed last Thursday to strengthen its coordination with other regulators to “guarantee the delivery of homes”.

The rebound in Chinese banking stocks was also aided by news that China will accelerate the issuance of special local government bonds to help supplement the capital of small banks, part of efforts to reduce risks in the sector.

Another regulatory measure included possible tighter rules around the escrow accounts where upfront payments for homes bought off the plan are held. The idea is for that money to be used to complete projects but there is concern that in some cases the funds can be diverted elsewhere by developers to pay off different debts.

With Reuters

July 18, 2022 at 11:12AM Martin Farrer with agencies

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