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Mortgage boycott risks manageable for China's banking system, but small lenders vulnerable, experts say

·4 min read

China's banking sector has sufficient buffers to avert a blow out in non-performing loans, as the ongoing revolt by mortgage borrowers is limited to smaller cities, which can be tackled once financial regulators address the cause of their grievances, according to industry analysts.

The mainland's banking system is capable of absorbing 7.5 trillion yuan (US$1.1 trillion) of loan loss before triggering a systematic risk, far more than the current value of mortgages involved in the boycott of nearly 1.1 trillion yuan, said DBS Group in a research report.

"Systematic risk [is] unlikely and earnings impact [is] not as big as thought," said analysts led by Manyi Lu in the report released on Monday. In the worst case scenario when banks need to bear all the bad debt, it will weigh on around 4 to 5 per cent of their full-year earnings this year, and in an unlikely worst case scenario, at a "manageable" level of 9.5 per cent, according to their estimates.

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The sanguine forecasts are underscored by the Chinese banking regulator's instruction over the weekend for lenders to loosen their credit taps to help beleaguered developers complete their homes. The move was aimed at addressing the central grievance of borrowers who were engaged in a mortgage boycott that involved more than 230 projects in around 86 Chinese cities.

Since last week, at least 15 Chinese banks have announced their exposure to the mortgages involved in the boycott, with most of them reporting around 0.01 per cent of their total mortgage lending.

However, experts pointed out this could pose risks to the banking system, which could possibly lead to hesitancy to lend to some key sectors and further add pressure on China's slowing economic growth, which grew by 0.4 per cent year on year in the second quarter. In such a scenario, small banks are particularly vulnerable, they said.

"Smaller and regional banks located in less-developed regions that have a large and concentrated exposure to distressed developers are likely to be the most vulnerable, as most home builders that have experienced distress since the second half of 2021 have projects in lower-tier cities in China's inner regions," said Fitch Ratings on Tuesday.

Smaller banks in China that have released their quarterly interim results so far have mostly reported lower non-performing loan (NPL) ratios.

Jiangsu Jiangyin Rural Commercial Bank recorded a 0.34 percentage point drop in its NPL ratio to 0.98 per cent, according to an exchange filing on Tuesday.

Bank of Jiangsu's NPL ratio fell 0.1 percentage point to 0.98 per cent from a year earlier, according to an exchange filing on Friday. Wuxi Rural Commercial Bank, a lender based in the eastern Jiangsu province, said its bad-loan ratio dropped to 0.87 per cent in the first half from 0.93 per cent a year earlier.

Bank of Nanjing, Bank of Hangzhou, Rural Commercial Bank of Zhangjiagang and Jiangsu Suzhou Rural Commercial Bank also reported slight declines of between 0.01 per cent and 0.07 per cent.

Most of the high-risk financial institutions identified by regulators are rural credit cooperatives and town-level rural banks, accounting for 91.4 per cent of vulnerable lenders in the country in 2021, according to Dong Ximiao, a veteran banking expert and chief researcher at Merchants Union Consumer Finance Company.

"Because of the global economic downcycle and the impact of the coronavirus pandemic, the risks in some regions and sectors have accumulated further. These risks are now spilling over into the real economy and into the financial sector, [causing] a few financial institutions to turn into high-risk institutions," he said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.