China has never seen anything like it. As in the United States – until the subprime crisis of 2007 – the possibility of problems in the mortgage market was extremely low.
But this mortgage strike is not entirely unpredictable. Homebuyers have every reason to be angry. Most of the projects were started by developers who defaulted. China Evergrande Group leads the pack, accounting for about 35% of total projects that faced mortgage revolts, according to data compiled by CLSA. One such project in eastern Jiangsu province was started before the Covid-19 pandemic. Construction has been on hold since last August, when property values in his neighborhood fell about 10%.
In other words, not only have affected households seen their wealth decline, but they also cannot move in and enjoy their new apartment. Over the years, with the consent of local governments, companies like Evergrande and Country Garden Holdings Co. have fueled the residential housing boom through a so-called pre-sale model: apartments are purchased well in advance of completion. Now the builders have run out of money to complete these projects.
To be sure, developer debt issues have drawn protests in the past, from vendors, employees, to the hapless retail investors who bought into their wealth management offerings. But this new development is something completely different. It opens a Pandora’s box and directly threatens the stability of Chinese banks. The Department of Housing, Urban and Rural Development met with financial regulators and major banks this week to discuss mortgage boycotts, Bloomberg News reported Thursday.
Unless the government of President Xi Jinping halts this stampede, a Lehman Brothers Holdings-wide banking system meltdown in 2008 is entirely on the cards. China is unprepared for so much of its bank lending to escalate.
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 mortgages. At China Construction Bank Corp., one of the largest banks in the world, mortgage loans make up more than 20% of its total assets.
Until this week, the Chinese middle class were great customers, dutifully paying their monthly bills. The government’s social credit system – a national credit score and a borrowing blacklist – worked well; bad credit can even hamper one’s ability to take high-speed trains. But what if some are just fed up and ready to shirk their obligations?
We’re not talking about one or two delinquent developers. Over the past year, 28 of the top 100 developers have defaulted or asked their creditors for extensions, according to data compiled by CLSA. Together, they account for around 20% of total real estate sales in China. Money is even tighter now. In the first half, real estate sales fell 72% from a year ago, further eroding their cash flow.
A monthly CLSA survey of the current status of Evergrande projects gives us insight into the number of unfinished sites in China. As of June, more than half of Evergrande’s projects were on construction halt. The broker estimates that around 840 billion yuan in mortgages are tied to abandoned sites across China.
It’s worth wondering how we even got there, especially for a stability-obsessed government.
All we have seen is political inertia. The developers have been struggling for over a year now, but there has been no progress in restructuring their finances. Local officials were unwilling to make tough decisions, write off bad debts and come to resolutions. Unable to shed 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 how the subprime mortgage crisis dragged down the venerable bank — and threatened the entire industry. This environment begins to resemble each other strangely.
More from this writer and others on Bloomberg Opinion:
• Why the real estate crisis in China is spreading: Shuli Ren
• Small failing Chinese banks reveal big problem: Trivedi & Ren
• The Central Bank of China needs a better helmsman: Ren and Trivedi
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.
More stories like this are available at bloomberg.com/opinion