Chinese banks are more exposed to the real estate sector than any other industry, boasting 39 trillion yuan in outstanding mortgages at the end of March, and 13 trillion yuan in loans to property developers. That’s equivalent to $7.7 trillion, and puts the country’s financial sector in a very delicate position.
Here’s the problem: the Chinese government has recently clamped down on the real estate sector, bringing construction all over the country to a halt. That’s left property developers struggling to make ends meet, and caused homebuyers who have paid in advance for a yet-to-be-built property – a common occurrence in China – to boycott mortgage payments until things start up again.
S&P Global Ratings estimates that the mortgage boycott alone puts 2.4 trillion yuan ($356 billion) worth of banks’ capital at risk, and their outstanding loans to developers are on thin ice too: 28 of the biggest 100 developers have either defaulted on bonds or negotiated extensions in the past year, according to advisory firm Teneo. So you can probably see why the Hang Seng Mainland Banks Index fell 12% last month, and why investors are worried that any more bad news could precipitate a much bigger collapse…
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