China seeks to stem mortgage boycott with developer loans

cHINA’S bank and property stocks rose after regulators sought to diffuse a growing consumer boycott of mortgage payments by urging banks to increase lending to developers so 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 Sunday, citing an unidentified senior official at the agency.

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 Inc. said in an interview on Bloomberg Television.

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

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 stabilizing 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 percent in the second quarter from a year ago, the national Bureau of Statistics said 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 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 Sunday that regulators had urged banks to support mergers and acquisitions by developers to help stabilize the real estate market. Banks were also asked to improve communications with homebuyers 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 ($312 million) of credit at risk. GF Securities Co. expects that as much as 2 trillion yuan of mortgages could be impacted 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 percent of the country’s middle-class wealth is also tied up in property.