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.
