Worst case scenario, Chinese banks will face a $350 billion loss from home loans as confidence in the market plunges.

The stalling of more and more real estate projects in China is dragging down the confidence of hundreds of thousands of state buyers, sparking a wave of debt repayment boycotts in more than 90 cities. This is raising a systemic risk warning. The current question is not whether China’s $56 trillion banking industry has suffered, but how much damage is caused by this problem.

S&P Global Ratings estimates that in the worst-case scenario, banks will lose about 2.4 trillion yuan ($356 billion), or 6.4% of home loans. Deutsche Bank warns the ratio is at least 7%. Currently, Chinese banks report about 2.1 trillion yuan of mortgage loans are directly affected by the boycott.

An unfinished project of Evergrande in Wuhan (China).  Photo: Bloomberg

An unfinished project of Evergrande in Wuhan (China). Photo: Bloomberg

“Banks are stuck in the middle,” said Zhiwu Chen, a professor of finance at the University of Hong Kong’s Business School. But if it helps, the government will not be happy, and they will also sink deeper into projects that are behind schedule.”

China’s economy is currently affected by Covid-19 and the youth unemployment rate is at a record high. Therefore, Beijing puts financial and social stability first. Up to now, they have extended home loan repayments and set up financial support funds for real estate firms. In both of these ways, the bank plays a central role.

Chinese banks lend more to real estate than other industries. According to data from the Central Bank of China (PBOC), as of the end of March, banks are recording 39 trillion yuan in home loans and 13 trillion yuan in loans to real estate firms.

Real estate “is fundamental” to financial stability in China, Teneo Holdings chief Gabriel Wildau said in a report earlier this month. Banks that are heavily involved in real estate will therefore be subject to stricter controls.

For example, home loans accounted for about 34% of the outstanding loans of China Postal Savings Bank and China Construction Bank at the end of 2021. This ratio is higher than the 32.5% ceiling applied to commercial banks. largest bank in the country.

Bad debts at Chinese banks were recorded at 2.9 trillion yuan at the end of March. This figure is forecast to set a new record and will squeeze the economy growing at the slowest pace in two years. .

The number of major Chinese cities that have seen home prices fall has risen to 70, up sharply from just 20 in January. S&P Global forecasts home sales in China will fall 33% this year, possibly prompting more real estate firms unfinanced and insolvent assets. About 28 of China’s 100 largest real estate firms by sales have defaulted on bonds or are negotiating a debt extension in the past year, according to Teneo.