$600 Billion in Bad Debts could be Caused by China Property Bubble

China Property Bubble has been an issue for analysts.

Any collapse in China’s red-hot property market is being put a price tag with respect to what it could cost banks, by China watchers.

According to DBS Vickers Hong Kong Ltd., a 4 percent of total loans worth 4.1 trillion yuan ($615 billion) could be soured by a drop of 30 percent in housing prices. 4 trillion yuan in delinquencies could be triggered by such a drop, said Commerzbank AG. Amid risks from the property sector, from the current 1.75 percent, the non-performing loan ratio is expected to peak at 6 percent in the next few years by Pacific Investment Management Co.

Economists are increasingly anticipating a banking system bailout that could rock the stock market and push up government borrowing costs even while bank losses under those scenarios would be a far cry from the $1.3 trillion in the U.S. after the 2008 financial crisis. The property “bubble” needed to be curbed after home prices rose 60 percent in the southern city of Shenzhen in a year, Ma Jun, the central bank’s chief economist, said in an interview with China Business Network last month.

“The amount of increase in housing prices in China that we have seen in recent years, especially this year, is concerning. Those increases in price year on year at 30 percent or more tend to suggest a bubble-like phenomenon,” said Roland Mieth, portfolio manager for emerging markets in Singapore at Pimco, which doesn’t have a real estate NPL estimate.

While Goldman Sachs Group Inc. wrote on Oct. 4 it saw growing vulnerability after prices “skyrocketed,” Deutsche Bank AG wrote in a Sept. 28 report that property could face a severe correction in 2018 as a bubble is spreading to more cities.

Last year’s stock market mania due to spiraling leverage and implicit state support is reminded of to JPMorgan Asset Management’s chief Asia market strategist Tai Hui by China’s surge in home prices. Risks will rise if the pace of lending is sustained while a sharp drop isn’t DBS Vickers’ base case.

“The property sector is the biggest concern for China’s banking system. If the property prices decline a lot, it would affect the quality of loans to property developers first because they are the most highly levered. The second-tier impact will be mortgages,” said Shujin Chen, a banking analyst at the brokerage in Hong Kong.

20 percent of loans go to residential mortgages and about 7 percent of loans go to developers, Chen estimates. Data compiled by Bloomberg show that from 4.9 five years ago, the median total debt at 144 listed Chinese builders jumped to 8.1 times earnings before interest, taxes, depreciation and amortization. Their total debt has also risen to a record high of 2.8 trillion yuan.

Compared to the 80 percent for the U.S., 85 percent for South Korea and 66 percent for Japan, the debt of households in China jumped to a record 40.5 percent of the nation’s economic output as of Dec. 31 from 28 percent in 2010, but was lower than those figures stated for other competing countries. As Chinese homebuyers need 20 to 30 percent down payments and banks have recourse to property, Bottom of Form

Goldman wrote it was not too concerned about a “foreclosure crisis”.

“Leverage and lending complexity around the property market is a lot less toxic” than in the U.S. before 2008 because of a relative lack of derivatives, said Pimco’s Mieth.

(Adapted From Bloomberg)

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Categories: Economy & Finance

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