The Hang Seng properties index dropped 2.9% yesterday and closed down again today at its lowest in over six years. Chinese credit markets continue to reel from more warnings of defaults.
Banks are being urged to extend credit to developers, so that unfinished homes can be completed. But the efforts by regulators to direct lending to the real estate sector threatens to further undermine bank profitability and saddle banks with more bad debts.
Even if developers can speed up the completion of unfinished homes, the longer-term prospects for China’s housing market do not look good. At the beginning of the year, China was already sitting on record numbers of excess vacant houses and urban projects. China is now expected to experience an “absolute decline in its population as early as 2023”, according to the United Nations World Population Prospects 2022 report, eight years earlier than previously projected.
The spill over effects from the Chinese real estate industry are being felt across the supply chains for developers. Hundreds of landscapers, construction companies, sculpture makers, and other suppliers to Evergrande are failing to repay loans.
More light is now being shed on the asset quality of banks: bad loans are thought to be heavily underreported. A paper published last year, titled Hidden Non-Performing Loans in China, underlines the threat posed to the Chinese banking system from the current turmoil in the property sector:
Recognizing these hidden NPLs imply that the total NPLs in the Chinese banking sector is two to four times of the reported amount: aggregate NPLs amount to 4 to 9 trillion RMB (approx. US$0.6-1.2 trillion) depending on the aggregation method and assumptions on NPL resolutions.
