China's troubled property market has global investors on edge

Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of July 13. PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - Former UBS Group economist Jonathan Anderson once called it "the most important sector in the universe".

More than a decade on, Chinese property is again grabbing the attention of global investors - this time for all the wrong reasons.

Mounting signs of stress this week in an industry that accounts for about a quarter of the world's second-largest economy are roiling China's credit markets, dragging down the nation's bank stocks and pummelling commodities from iron ore to copper.

After a burst of optimism earlier this year that looser regulatory curbs might stem the industry's debt crisis, investors are getting spooked by rolling Covid-19 lockdowns and a rapidly escalating home buyer boycott of mortgage payments on stalled projects.

The bigger worry is that a widespread loss of confidence in real estate will put major strain on China's economy and financial system, which is sitting on 46 trillion yuan (S$9.6 trillion) of outstanding mortgages and still has 13 trillion yuan of loans to the country's beleaguered developers.

"Property has been getting steadily worse the whole time; prices, sales, starts, all terrible," said Mr Craig Botham, chief China economist at Pantheon Macroeconomics in London. "The chronic deterioration has now taken another step. It was always going to hit the financial sector eventually, given the prevalence of collateral in loan books with large real estate portions."

The turmoil this week has battered what was already one of the world's most stressed industries. The average yield on Chinese junk dollar debt, which is dominated by developers, has surged to almost 26 per cent. Panic has also spread to investment-grade builders, with a bond issued by China Vanke, the nation's second-largest builder by sales, falling to a record low of 81.6 cents on the dollar on Tuesday (July 12).

China's Covid-19-zero policy is exacerbating the situation by damping demand for property and depressing economic activity. Lockdowns remain commonplace in China, which continues to stick to a policy of keeping out the virus with stringent curbs. A recent flare-up in Shanghai has spurred concern that the city could be heading for another lockdown.

Concern that mortgage boycotts will lead to a rise in souring loans sent a gauge of Chinese bank shares to its lowest level since March 2020.

The Chinese authorities held emergency meetings with major banks this week to discuss the mortgage boycotts on concern that more buyers may follow suit, according to people familiar with the matter. Some lenders plan to tighten their mortgage-lending requirements in high-risk cities, two of the people said.

Home buyers have stopped mortgage payments on at least 100 projects in more than 50 cities as at Wednesday, according to researcher China Real Estate Information. This is up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group analysts.

"If more home buyers cease payment, the spreading trend will not only threaten the health of the financial system but also create social issues amid the current economic downturn," Ms Betty Wang, a senior economist at Australia and New Zealand Banking Group, wrote in a note.

Banks are rushing to reassure investors that risks from loans to home buyers were controllable, with at least 10 firms issuing statements. State-owned Agricultural Bank of China said it held 660 million yuan of overdue loans on unfinished homes, while smaller rival Industrial Bank said 1.6 billion yuan of mortgages was impacted, of which 384 million yuan has become delinquent.

Nomura Holdings said the refusal to pay mortgages stems from the widespread practice in China of selling homes before they are built. Confidence that projects will be completed has weakened as developers' cash woes intensified.

Nomura economists estimate that Chinese developers have delivered only around 60 per cent of homes they presold between 2013 and 2020, while in those years China's mortgage loans rose by 26.3 trillion yuan.

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

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. About 70 per cent of household wealth is stored in property, along with 30 per cent to 40 per cent of bank loan books, while land sales account for 30 per cent to 40 per cent of local government revenues, according to Pantheon's Mr Botham.

The worsening crisis will test the authorities' ability to minimise the fallout. Earlier this year, China was setting up a stability fund to provide support to troubled financial firms as risks to the economy grow. Handling such issues will be also key for Chinese President Xi Jinping ahead of a leadership confab widely expected to cement his rule for life.

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