While US snowflakes are all too happy to talk the talk (which remains free, even despite Biden's hyperinflation), Chinese residents are increasingly walking the walk. First, it was the violent outcry against mandatory covid vaccines that put an end to Beijing's desire to forcibly innoculate all Beijing residents in just 48 hours - a feat not all of America's armed militias have been able to achieve, and now it's a grassroots push for what appears to be a debt jubillee as millions of homeowners suddenly stop paying their mortgages, a shocking move that has sent shockwaves across China's capital markets and has sparked panic within China's political leadership circles.
As Bloomberg reports overnight, a rapidly increasing number of "disgruntled Chinese homebuyers" are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s real estate woes and stoking fears that the crisis will spread to the wider financial system as countless mortgages default.
According to researcher China Real Estate Information, homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen.
“The names on the list doubled every day in the past three days,” Chen wrote in a note published Thursday. “The incident would dampen buyer sentiment, especially for presold products offered by private developers given the higher risk on delivery, and weigh on the gradual sales recovery.”
What's behind this grassroot movement to halt mortgage payments altogether? Negative equity:
Analysts believe that a drop in home values may be another driver for the refusal to meet mortgage payments. “Investors are concerned about the spread of mortgage payment snubs to buyers, simply due to lower property prices, and the impact on property sales,” Chen wrote.
According to Citi analysts, average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years. Meanwhile, it's only getting worse as China’s home prices fell for a ninth month in May, with June figures set for release Friday.
The crisis engulfing Chinese developers is reaching a new phase, with a debt selloff expanding to firms once deemed safe from the cash crunch, including investment-grade names such as Country Garden Holdings, the largest builder by sales.
The payment refusals, which come at a time when China's economy is set to post what may be a negative GDP print due to the latest economic shutdown over Xi's catastrophic zero covid policies, underscore how the storm engulfing China’s property sector is now affecting hundreds of thousands of average citizens, posing a threat to social stability ahead of a Communist Party Congress later this year. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.
As a result of the unprecedented push for a debt jubilee, shares of China’s banks extended their recent decline Thursday, with the CSI 300 Banks Index falling as much as 3.3% before closing down 2.2%. A Bloomberg Intelligence index of Chinese developer stocks slid as much as 2.7%, even though Chinese lenders were quick to try and dispel fears that the movement could crash the economy: according to Bank of Communications, its outstanding balance of overdue mortgage loans linked to housing projects with risks of delayed delivery is 99.8 million yuan, accounting for 0.0067% of its domestic housing mortgage balance. The bank added that its housing mortgage loan quality is stable and risks are controllable, the Shanghai-based lender says in an exchange filing. At the same time, Postal Savings Bank of China says its overdue mortgage loans linked to halted housing projects is 127m yuan, and risks are controllable. Of course, it's not like Chinese banks would ever lie, now is it?
Which is why others remained skeptical: Nomura analysts said the refusal to pay mortgages stems from the widespread practice in China of selling homes before they’re built. Confidence that projects will be completed has weakened as developers’ cash woes intensified, according to the Japanese bank. Even before the crisis, developers only delivered around 60% of homes they presold between 2013 and 2020, while outstanding mortgage loans rose by 26.3 trillion yuan, Nomura analysts including Ting Lu wrote in a note Wednesday.
“Presales carry mounting risks for developers, homebuyers, the financial system and the macro economy,” Ting wrote. Failure to build homes on time reduces households’ willingness to buy new properties, and rising raw material prices may mean funds from presales are insufficient to construct them.
We are especially concerned about the financial impact of the homebuyers’ ‘stopping mortgage repayments’ movement,” Ting wrote. “China’s property downturn may finally adversely affect onshore financial institutions after hitting the offshore high-yield dollar bond market.”
* * *
While rising non-performing loans for Chinese banks are “manageable” for now, “more risk events are likely to come, at the backdrop of China’s growth slowdown, residents’ expectation of worse future income, and shrinking property sales,” affecting China’s social stability, Jefferies’s Chen said.
At that point Beijing will be faced with a stark choice: inject a massive amount of liquidity into the market, or brace for the biggest fear for every Chinese politician: a middle-class insurrection. We doubt they will pick the latter.
And while the odds are low that this latest example of testicular fortitude demonstrated by millions of increasingly desperate Chinese citizens will be imitated in the US, the last thing the flailing US economy can afford is a similar self-imposed debt jubilee, one which will see the Fed injection trillions into the economy in no time.