Property Market Fallout in China’s Financial System

China’s property market has suffered over the past year and significantly slowed the economy, but losses in the all-important sector have not yet emerged within China’s financial system. We conservatively estimate total property sector onshore borrowing of 73 trillion yuan ($10.5 trillion), of which developers holding 3.8 trillion yuan in interest-bearing debt have already defaulted on their onshore bonds, and likely additional forms of borrowing as well. Only a small proportion of these losses have been recognized so far.

The most vulnerable financial institutions are trust companies, asset management companies, and other non-bank financial institutions (NBFIs), as these firms will struggle to repay their investors given falling returns from property-related lending. As long as mortgage boycotts remain under control, the banking system as a whole can remain insulated from financial pressures. However, smaller banks and local governments will face additional credit events, such as the runs and protests seen in Henan this year.

Posted September 15, 2022
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