The specter of a real estate liquidity crunch hangs over Chinese banks


SHANGHAI – The massive lending of Chinese banks to the real estate sector seems increasingly likely to backfire on many as default fears rise – and could ultimately make it harder for authorities to bail them out.

Chinese banks’ total loans to developers stood at 14.2 trillion yuan ($ 2.2 trillion) at the end of June, according to Moody’s Investors Service. This represents 7.4% of total bank loans, according to Moody’s, and is equivalent to more than half of the 25.5 trillion yuan in net capital held by commercial banks according to government data.

This exposure now leaves many institutions facing the risk of a capital shortage as developer China Evergrande Group and other debt-ridden real estate companies warn they may not be able to repay the bonds on time.

The problem becomes even more important when looking at other types of real estate debt. Citigroup estimates this broader category to be around 130 trillion yuan, including 58 trillion yuan in loans with property as collateral, 34 trillion yuan in mortgages, 20 trillion yuan in real estate financing to companies affiliated with local government. and 2,000 billion yuan. in mortgage loans from parallel banks.

Investors fear that if the Chinese real estate bubble bursts, widespread defaults could leave banks in hot water.

A China Construction Bank executive assured investors on Friday that the public lender had “relatively low” exposure to Evergrande and that the risk was “controllable”. The bank’s share price fell to its lowest level for about four years in August, and the total market capitalization of China’s four big state-owned banks fell nearly 40% below its 2018 high.

Some lenders are more deeply entangled in the industry. Real estate accounts for more than 10% of business loans at six of the 41 listed banks in Shanghai and Shenzhen, including the Shanghai Commercial and Savings Bank, China Zheshan Bank and Ping An Bank, according to Shengang Securities.

And Evergrande isn’t the only developer struggling to pay off debt.

Hong Kong-listed China Properties Group said on Friday that a subsidiary had failed to repay the principal of a $ 226 million bond. Second-ranking Sinic Holdings has warned that a default “will likely occur” on bonds due Monday. Uncertainty remains as to whether Central China Real Estate will be able to meet the November 8 deadline for a $ 400 million bond issue.

The situation is serious enough that the authorities have already started pumping public funds into failing banks. In 2020, China authorized the use of capital raised by local governments for infrastructure projects to support small and medium-sized lenders. But the 200 billion yuan spent on this effort was quickly used up.

The turmoil could affect China’s ability to support its financial system with public funds as it has done in the past. Central and local government finances are closely linked to the real estate market.

Land sales represent a significant portion of government revenue. Revenues from these transactions at the central and local levels totaled 8.4 trillion yuan in 2020, equivalent to more than half of total tax revenue.

But selling land has become more difficult as market conditions have deteriorated. Land sales revenue fell nearly 20% year-on-year in August, according to the finance ministry, as cash-strapped developers avoided high bids. A land auction by Beijing this month got no bids for 26 of the 43 lots, and the city government was forced to extend the deadline.

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