China property bubble may incur $845b in bad debts

BEIJING • China watchers are starting to put a price tag on what any collapse in the nation's red-hot property market could cost banks.

A drop of 30 per cent in housing prices could cause 4 per cent of total loans worth 4.1 trillion yuan (S$845 billion) to sour, according to DBS Vickers Hong Kong.

Commerzbank said such a drop could trigger 4 trillion yuan in delinquencies. Pacific Investment Management expects the non-performing loan ratio to peak at 6 per cent in the next few years from the current 1.75 per cent, amid risks from the property sector.

While bank losses under those scenarios would be a far cry from the US$1.3 trillion (S$1.8 trillion) in the United States after the 2008 financial crisis, economists are increasingly anticipating a banking system bailout that could rock the stock market and push up government borrowing costs.

Mr Ma Jun, the central bank's chief economist, said in an interview with China Business Network last month that the property "bubble" needed to be curbed after home prices rose 60 per cent in the southern city of Shenzhen in a year. 

Deutsche Bank wrote in a Sept 28 report that property could face a severe correction in 2018 as a bubble is spreading to more cities, while Goldman Sachs Group wrote on Tuesday that it saw growing vulnerability after prices "skyrocketed".

China's surge in home prices reminds JPMorgan Asset Management's chief Asia market strategist Tai Hui of last year's stock-market mania because of spiralling leverage and implicit state support.

While a sharp drop is not DBS Vickers' base case, risks will rise if the pace of lending is sustained.

"The property sector is the biggest concern for China's banking system," said Ms Shujin Chen, a banking analyst at the brokerage in Hong Kong.

"If the property prices decline a lot, it would affect the quality of loans to property developers first because they are the most highly leveraged. The second-tier impact will be mortgages."

Loans to households soared to 71 per cent of total new lending in August, from 24 per cent in January.  "Chinese banks are extending mortgage loans very aggressively," said Ms Christine Kuo, a Hong Kong-based senior vice-president at Moody's Investors Service. "Those loans are becoming riskier because housing prices are at a frothy level."

Fitch Ratings estimates Chinese banks' exposure to the sector, including off-balance sheet lending and corporate loans using real estate collateral, may be as high as 60 per cent of total credit.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on October 08, 2016, with the headline 'China property bubble may incur $845b in bad debts'. Print Edition | Subscribe