China property crisis enters dangerous next phase

3 minute read

Scaffolding surrounds an unfinished residential building at Evergrande Cultural Tourism City, a China Evergrande Group project whose construction has halted, in Suzhou's Taicang, Jiangsu province, China October 22, 2021. REUTERS/Aly Song

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HONG KONG, July 14 (Reuters Breakingviews) - China’s property crisis is leaping out of the frying pan and into the fire. Homebuyers in 22 cities are refusing to make mortgage payments on unfinished homes, Citigroup reports. The rare protest extends the risk of defaults from offshore developer bonds read more to banks with $6 trillion of mortgages. The fat tail risk of President Xi Jinping’s efforts to deleverage the sector is emerging, and it puts Beijing in a tight spot.

The economic miracle of the People’s Republic had some key features: Ever-rising home prices, surging household debt, and a real estate sector that broadly contributes to one third of GDP. Wary of an asset price bubble, Xi drew three “red lines” last year to restrict financing and force developers to deleverage. A flurry of defaults ensued, including that of property giant China Evergrande (3333.HK), forcing bondholders to accept extensions or chase lawsuits. The revolt on mortgage payments underscores Beijing’s failure to ensure the losses stop there.

It puts the focus on China’s property buying preferences. New launches are almost always sold before they are built. When heavily indebted developers run out of cash, buyers are left with nothing but a debt obligation. Evergrande warned of this problem in a letter it wrote in 2020 to local authorities: The company pleaded to be allowed to list a subsidiary to avoid a cash crunch that it said would cause huge financial and social risks, including two million buyers who might protest over their 600,000-odd unfinished apartments.

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Policymakers recognised the problem – including potential misuse of down payments - and ordered developers to prioritise available funds on finishing projects. But it only briefly worked read more . As sales continue to tank and new financing remains in short supply, construction on about 10% of homes sold in 2021 in 24 major cities has stalled, per consultancy CRIC. China Merchants Securities analysts estimate at least 1.7 trillion yuan ($250 billion) of mortgages could be impacted by such delays.

Beijing will have to react fast to prevent the situation from escalating, either by allowing homebuyers to delay mortgage payments or letting local governments buy off projects. China Merchants Bank (600036.SS) and Ping An Bank (000001.SZ) stocks were down 4% each by mid-afternoon on Thursday in a flat market hinting at the pain to come for lenders. China's property reset is entering a dangerous and decisive phase.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Buyers of housing units in dozens of unfinished projects across China are refusing to make mortgage payments to protest developers’ failure to meet construction schedules, Chinese media Caixin reported on July 14. Petitions from homebuyers to local authorities demanded developers resume construction and deliver projects on time, the report added.

Homebuyers of 35 projects across 22 cities have decided to stop paying mortgages after prolonged construction suspension, Citigroup wrote in a research note published on July 12.

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Editing by Una Galani and Pranav Kiran

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Beijing, crunching economic data, interviewing high-level officials, and travelling to far-flung provinces to visit factory floors and talk to local shopkeepers. Before that, she spent nearly three years in Santiago, Chile, where she built a trade news website reporting on the produce industry – and developed Spanish as a third language alongside Mandarin Chinese and English.