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China tries to stem mortgage boycott with developer loans

Qilai Shen

Hong Kong | China’s regulators sought to diffuse a growing consumer boycott of mortgage payments by urging banks to increase lending to developers so that they can complete unfinished housing projects.

The guidance from the China Banking and Insurance Regulatory Commission was issued in response to the boycotts and is aimed at expediting the delivery of homes to buyers, a newspaper published by the watchdog reported on Sunday, citing an unidentified senior official at the agency.

An estimated 70 per cent of the country’s middle-class wealth is tied up in property. Getty

China is looking to stem the protests that have flared up at 100 housing projects across 50 cities, threatening to spread the real estate crisis to the banking system. Regulators met with banks last week to discuss the boycotts, while state media have cited analysts warning that the stability of the financial system could be hurt if more home buyers follow suit.

“The core issue here is for the government to step in quickly to boost confidence, to solve the problem at hand, and also provide more clarity to the market and investors on how this downturn in the property sector is going to be resolved,” Hui Shan, chief China economist at Goldman Sachs Group said in an interview.

Bank stocks rallied on the report, as the CSI 300 Bank Index jumped 1.3 per cent, the first gain in nine sessions. Shares of Chinese lenders dipped 7.7 per cent last week, the biggest decline in more than four years. A gauge of property shares rose 3.6 per cent on Monday.

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The boycotts over project delays also pose a risk to the broader housing market by keeping potential homebuyers on the sidelines. The market had seen signs of stabilising in recent months, with some analysts calling for a turnaround in the second half of the year.

Output in the real estate industry, a key economic contributor, contracted 7 per cent in the second quarter from a year ago, the National Bureau of Statistics said on Saturday. It remained the biggest drag on the world’s second-largest economy among all sectors, and performed worse than the first quarter of 2022.

“In a worst-case scenario, the issue could trigger systemic financial risk and social instability, given housing’s role as a bedrock of the broader financial system,” Gabriel Wildau, a managing director at global business advisory firm Teneo, wrote in a note on July 15. “But our base case is that regulators will succeed in containing the crisis by strong-arming state-owned banks into supporting troubled developers so that they can complete stalled projects.”

The China Banking and Insurance News meanwhile reported on Sunday that regulators had urged banks to support mergers and acquisitions by developers to help stabilise the real estate market. Banks were also asked to improve communications with home buyers and to protect their legal rights, the report said.

China’s commercial banks that have disclosed their overdue loans on unfinished homes have so far detailed more than 2.11 billion yuan ($460 million) of credit at risk. GF Securities expects that as much as 2 trillion yuan of mortgages could be affected by the boycott.

While the lenders have called the situation controllable, concerns have persisted given the importance of the sector. The real estate industry, when including construction, sales and related services, accounts for about a fifth of China’s gross domestic product. An estimated 70 per cent of the country’s middle-class wealth is also tied up in property.

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The move to try to defuse the growing consumer boycott comes as China’s COVID-19 situation worsened, with more places reporting outbreaks and imposing curbs, even as cities that had been locked down or under restrictions started to open up.

Beihai, a seaside tourist city in southern Guangxi province, has become the latest hotspot, with more than 560 cases in the week. The city locked down at least two districts, and is requiring residents in those areas to stay at home, with multiple rounds of mass testing under way.

Bloomberg

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