Rise in mortgage defaults in China raises risks, authorities likely to step in – Fitch

 

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A rise in the number of Chinese homebuyers ceasing mortgage payments on properties where construction has been suspended for a prolonged period could weaken banks’ asset quality and authorities are likely to step in to curb mortgage defaults from spreading more widely and to larger cities, says Fitch Ratings.

A failure of policy intervention to restore homebuyer confidence could test the banking system’s resilience and heighten liquidity pressure at developers, it said.

“We do not believe the defaults will directly affect Fitch-rated Chinese banks, with most disclosing that affected mortgage loans amount to less than 0.01% of their outstanding residential mortgage loans, however, should defaults escalate, there could be broad and serious economic and social implications,” it said.

Smaller and regional banks in less-developed regions that have a large and concentrated exposure to distressed developers are likely to be the most vulnerable, as most homebuilders that have experienced distress since 2H21 have projects in lower-tier cities in China’s inner regions, it said.

In the base case, “China’s property sales will stabilise in 2H22, based on our current expectation of a 25%-30% decline in 2022 sales, followed by low single digit growth in 2023,” it said.