A prominent Chinese economist has expressed concern about the sizeable rise in real estate-related non-performing loans (NPLs) made by China’s big state-owned banks and joint-stock lenders, as well as the potential for further unchecked increases to trigger a systemic financial crisis.
In an opinion piece published on Sina, economic commentator Mo Kaiwei (莫开伟) highlighted the sizeable rise in the real estate-related NPLs at China big six state-owned banks – Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications (BOCOM), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and Postal Savings Bank of China (PSBC) – based on their 2022 annual reports.
According to Mo, total NPLs in relation to the real estate sector for the big six banks as well as seven of China’s joint-stock banks reached 153.754 billion yuan in 2022, for an increase of 96.17 billion yuan compared to the previous year.
NPLs related to public real estate increased by 106.774 billion yuan, a year-on-year (YoY) rise of 72%, while mortgage-related NPLs increased by 46.98 billion yuan.
Mo points out that while the NPL ratio for mortgages remains at a comparatively low level, the growth rate for such NPLs has risen to unprecedented heights since the onset of the Covid pandemic.
“The three-year pandemic should be viewed as the most direct trigger for the non-performing real estate loans of listed banks,” Mo writes, pointing in particular to real estate enterprises as potentially the “biggest victim” of China’s Covid-related lockdown measures.
“The real estate market has seen a decline in sales, a backlog of housing inventory, and an extension of the capital recovery cycle, while the capital chains of a large number of real estate companies have been broken, and many small and medium-sized real estate companies have gone bankrupt.
“A number leading real estate companies that were heavily indebted are facing a liquidity crisis, causing them to suspend operations and drive up the total volume of non-performing real estate loans and their non-performing ratios at listed banks.”
“At the same time, the three-year pandemic has caused a large number of micro and small enterprises to succumb to operational difficulties…the employment situation is bleak, and people’s incomes have significantly decreased. This has led to a considerable number of mortgage defaults, which has also significantly driven up the total volume of non-performing real estate loans and their non-performing ratios at listed banks.”
Mo called for the adoption of a raft of advance measures to “contain the real estate-related NPLs and NPL ratios of listed banks to a minimum, and avoid banks triggering a systemic financial crisis due to real estate-related NPLs.”
These measures include:
- Financial regulatory agencies increasing inspection and supervisory efforts, and requiring a comprehensive and thorough clarification of the volume of non-performing loans related to the real estate sector. “Prevent false reporting and concealment, expose all non-performing loans related to real estate, so that the financial regulatory authorities and macro decision-making departments of the central government have a clear understanding and can adopt corresponding measures to resolve the risk of non-performing loans related to real estate.”
- Carefully evaluating and identifying the real estate-related non-performing loans of listed banks. “Dispose in a timely manner of [NPLs] with significant risks that are unlikely to be recovered, via measures including public auctions to central and local asset management companies for overall package transfer, in order to alleviate the operational and assessment pressures of real estate loans for listed banks.”
- Upholding the implementation of a long-term real estate regulation mechanisms. “Fully respect the subjective management intentions of banks when it comes to future real estate loan issuance; give banks full autonomy in providing real estate credit…local governments cannot artificially intervene in bank real estate loans, nor can they force banks to issue real estate loans to avoid a ‘hard landing’ of the real estate sector and spread the risk of the real estate sector to the entire banking sector.”
- Encouraging listed banks to accelerate their strategic transformation. “Gradually shift from over-reliance on real estate credit towards the provision of credit to the manufacturing, service, and other economic sectors. Gradually ‘fade out’ the concept of real estate credit, so that the operational flexibility of listed banks is no longer bound by real estate, and they eventually stay away from the ‘whirlpool’ of real estate credit risks.”