China property: refusing to pay mortgages is a powerful political weapon

Chinese president Xi Jinping tends to get his way. But there is one rare group that even he cannot control. China’s angry homeowners are furious at floundering property developers. Local banks will probably have to foot the bill to keep Xi’s policies intact.

Beijing’s crackdown on its indebted property market was undeterred by a string of developer defaults and nearly a hundred billion dollars of value lost in Chinese property company high-yield bonds. But protests by China’s middle class could unravel the government’s efforts.

The problem for Chinese developers is that protests are accompanied by rapidly spreading boycotts on mortgage payments in nearly 100 cities. The first group of affected homebuyers are the ones who have already paid an estimated Rmb2tn ($296bn) for homes that developers failed to deliver because of financial troubles. Falling property prices mean that anger, and boycotts, could soon spread to homeowners who are paying steep payments for houses whose values have fallen.

Xi is months away from securing a historic third term in office. Addressing social discontent is crucial. Unrest among ordinary homeowners could threaten the foundation of his push for “common prosperity”.

Local banks will therefore be leaned on to fill in the financial gaps. The sector, which is already dealing with a rise in its bad debt balance, will probably have to absorb the losses from boycotted mortgage payments.

However, the country’s roughly 4,000 local banks already have suffered a run on deposits in the past year thanks to the effects of the poor property market. They do not have the resources to deal with such losses.

Historically, the largest local state-owned banks such as Industrial and Commercial Bank of China (ICBC) have bailed out smaller banks, often by buying stakes in the local banks. That may not happen this time. Shares of the largest banks, including ICBC, Agricultural Bank of China and China Construction Bank, are down this year. They trade at just a third of their book value, less than half that of regional peers such as HSBC.

Local lenders are heavily exposed and need help. Combined, they have an estimated $6.8tn in outstanding real-estate loans. That equates to about a third of the total loans for the largest banks. The trend could mark a bad start to Xi’s third term.