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Banks, experts downplay risks from mortgage defaults

By SHI JING,WANG YING in Shanghai and JIANG XUEQING in Beijing | CHINA DAILY | Updated: 2022-07-15 09:10
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An unfinished building is demolished in Jinan, Shandong province. [Photo/CHINA DAILY]

Leading banks and industry experts on Thursday downplayed fears over perceived risks to China's financial system from the suspension of mortgage payments by homebuyers in certain smaller cities across the nation.

Even if risks arise, they can be effectively controlled, they said.

On Thursday, leading commercial banks including China Construction Bank and Agricultural Bank of China, said home loans whose repayments have been suspended by homebuyers are marginal and associated risks are controllable.

As of Thursday, some people who bought homes in about 150 property projects across 20 provinces and regions refused to make mortgage payments due to delayed deliveries of their presold homes.

The figures are as per the estimates of China Business News, and much higher than those of China Real Estate Information Corp, which said on Wednesday that 106 projects are facing defaulted mortgage loans.

Li Yujia, chief researcher at the provincial planning institute's residential policy research center of Guangdong, attributed the mortgage payment suspension to the failure of delivery or even construction of certain residential projects.

Homebuyers who had to rent apartments while continuing to make their monthly mortgage payments found it increasingly difficult to do so.

Selling new homes before completion and delivery is a conventional practice in China. Property construction can proceed with the pre-sale funds, which is usually under governmental supervision.

But the recent mortgage payment suspension has raised an alarm, said Yan Yuejin, director of Shanghai-based E-house China Research and Development Institution.

TF Securities' analysts said a worst-case scenario might see about 5 to 10 percent of property projects delaying delivery. Their corresponding sales value could be between 910 billion yuan ($135 billion) and 1.82 trillion yuan, they said.

Data from the People's Bank of China, the country's central bank, showed that new home loans account for 38 percent to 42 percent of new home sales revenue. This ratio has remained stable for years.

So, a back-of-the-envelope calculation indicates mortgage loans whose payments have been suspended could be worth between 360 billion yuan and 730 billion yuan-that is, about 0.9 percent to 1.9 percent of the mortgage balance of the first quarter of 2021.

The ratio, TF experts assured, is not big enough to exert any impact on the whole financial system.

Sun Tianqi, head of the financial stability bureau at the PBOC, said at a news conference on Wednesday that China's financial risks are moderate and generally controllable, with 99 percent of the banking assets remaining within the safe limits, as reflected by the central bank's ratings for most small and medium-sized banks.

Agreed Dong Ximiao, chief researcher at Merchants Union Consumer Finance Co Ltd. Suspension of home loan repayments by some homebuyers will exert little impact on banks' assets, given the relatively small size of such loans in banks' overall offerings.

Experts said local governments should step in and help establish a link between developers and banks so that related issues can be sorted out. Refund of tax or land remise can be implemented temporarily so that developers can access more capital for construction.

On the other hand, banks can provide more financing support for projects facing bigger delivery difficulties. For homebuyers whose properties are long overdue, banks can extend the tenure of loans, Dong said. In China, home loans typically have a 30-year tenure.

David Yin, senior credit officer at Moody's Investors Service, said defaulted mortgage loans related to projects of distressed developers account for only a small proportion of banks' total mortgage loan book.

However, Yin said these defaults may further weaken homebuyers' confidence and reduce banks' risk appetite for mortgage loans, further dampening property sales.

Wind Info data showed the A-share banking sector, which fell 1.69 percent on Wednesday, declined another 1.54 percent on Thursday. The CSI Banking Index fell by 2.04 percent on Thursday while the benchmark Shanghai Composite Index slipped a tad.

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