SinoInsight 1
Since mainland media began paying attention to home buyers in China boycotting mortgage payments over unfinished projects around the middle of July, at least 319 projects across 98 cities in 26 provinces have been impacted as of July 19. The bulk of the affected projects was in Henan Province, with 62 stalled developments. Also, 85 of the 319 projects (26.7 percent) belong to China Evergrande.
July 16
A video circulating on Chinese social media showed buyers of an unfinished project in Henan Province questioning a bank president about inadequate fund supervision and how the project stalled due to the developer’s misappropriation of funds. The bank president replied that the Zhengzhou housing authorities are the last link in the chain of fund supervision, and the bank had only issued funds to developers because they had the approval of the authorities. He added, “In other words, we were working as instructed (聽招呼幹活),” and “if [the authorities] didn’t approve of the withdrawals [of funds by developers], we wouldn’t have allowed the withdrawals” because it was illegal to misappropriate supervised funds. The bank president then advised the buyers to call the police.
According to state-linked mainland media Southern Metropolis Daily, the unfinished project in the video is “Kangqiao Jiuxi Yuan” (康橋玖璽園) in Henan’s capital city of Zhengzhou. The project went up for sale in July 2020 and topped the sales chart in Zhengzhou that year. Sales were completed in early 2021, with more than 1,700 buyers and the developer taking in 4.4 billion yuan. Buyers said that they were supposed to get their houses in October 2023, but the project stalled from 2021 and is far from completion.
Southern Metropolis Daily reported that a “relevant person in charge” of the Zhengzhou housing authorities refuted the bank president’s claim in the video, adding that “the bank’s statement is inconsistent with the facts.” The “relevant person in charge” said that the situation has been reported to the relevant departments and the bank will be held accountable.
July 17
The China Banking and Insurance Regulatory Commission (CBIRC) said that banks should “shoulder the responsibility” and meet the financing needs of developers where possible, according to its official media China Banking and Insurance News.
The CBIRC also expressed confidence that “all the difficulties and problems will be properly solved” with concerted efforts.
The news saw banking and real estate stocks recover some losses. Chinese property stocks gained 3.1 percent on the mainland and 3.7 percent in Hong Kong at the close on July 18. Meanwhile, China’s banking index climbed 1.4 percent after falling 7 percent (an over two-year low) in the week of July 11.
July 18
Bloomberg News reported that PRC financial regulators could allow buyers of stalled property projects to temporarily halt mortgage payments without impacting their credit scores. People familiar with the matter say that the plan, which is yet to be finalized, is part of a broader effort to stabilize the real estate market that includes getting banks and local governments to “plug some of the funding shortages at developers.”
The sources also say that regulators are calculating that the payment freeze is necessary to “inject confidence into the market and buy time for developers to complete projects,” even though the move could backfire should buyers of completed properties also start to protest for relief after home prices fall. Local governments and banks will decide homebuyer eligibility and the length of grace periods in the plan, they added.
July 19
1. Mainland media Yicai Global said that it interviewed a “head of a relevant department of the CBIRC” on July 17 about dealing with unfinished projects and mortgage boycotts. The department head said that the CBRIC “attaches great importance to the issue,” and is strengthening coordination with the Ministry of Housing and Urban-Rural Development, the People’s Bank of China (PBoC), and other departments to tackle it.
The CBIRC department head added that the authorities still adhere to “houses are for living in, not speculation” (房住不炒), “stable land prices, stable housing prices, and stable expectations” (穩地價、穩房價、穩預期), and support local governments to more vigorously promote the work of “guaranteeing the delivery of houses, guaranteeing people’s livelihood, and guaranteeing stability.”
2. Mainland media National Business Daily reported that many local governments have introduced policies to prevent delays in the delivery of commercial housing after a wave of home buyers suspended mortgage payments on stalled projects. The policies include stipulating the percentage of presale funds that developers can withdraw based on the progress of project development.
Zhang Dawei, Centaline Real Estate chief analyst, told National Business Daily in a WeChat interview that the PBoC had stated in a 2003 document (“Document No. 121”) that “personal housing loans can only be issued to individuals who purchased houses whose main structure has been roofed” and banks should recover misappropriated funds “within a certain period” from “developers that misappropriate home loans for other purposes.” Zhang added that it would be very difficult for projects to stall had the aforementioned policies been adhered to.
3. Henan Asset Management and developer Zhengzhou Real Estate Group announce plans to create a property developer bailout fund in Zhengzhou City, according to a statement by the asset manager. The Zhengzhou city fund seeks to help “revitalize problematic property projects and rescue developers with difficulties,” Henan Asset Management said without revealing the fund’s size.
OUR TAKE
1. As more developments and information about unfinished projects and mortgage boycotts emerge, it is becoming clearer that the CCP system’s deficiencies (central-local government contradictions, etc.), corruption (business-official collusion, etc.), and Party culture (staying “great, glorious, correct” at all costs, etc.) are to blame for the latest property sector crisis.
The case of the “Kangqiao Jiuxi Yuan” project in Zhengzhou appears to be a microcosm of the problem with stalled projects in the PRC. Lax local government supervision allowed the developer to misappropriate presale funds. When buyers began suspending mortgage payments over the developer’s apparent inability to deliver their property on time, the local bank and government each faulted the other for a crisis that they were both partly responsible for producing. Meanwhile, buyers end up on the losing end of developer-bank-government collusion to profit from the property market.
The problem with unfinished projects can be further traced upward to the central government. To keep up the CCP regime’s “great, glorious, correct” image and better allow the Party to survive and dominate, Beijing often announces very ambitious policies (“zero-COVID,” eradication of extreme poverty, semiconductor “Great Leap Forward,” etc.) and ties the performance appraisals of officials to how well local governments are able to implement those policies. Put another way, local officials looking to win promotion and ensure career security must show results in executing the central government’s policies.
Policy implementation, however, often requires plenty of funds to see results. To boost their coffers, many local governments have become reliant on land sales. To sell more land and generate more revenue, local governments have incentive to cooperate with developers and allow the latter to build more property, maintain a high turnover rate, and keep real estate prices up. To finance their operations, developers would need the banks to free up presale funds. Thus, a situation emerged where local governments looking to generate more land revenue to finance Beijing’s ambitious policies and secure political achievements relaxed their supervision over banks, who then issued supervised presale funds to developers to maintain their Ponzi-like business schemes.
During better times, the implicit collusion between local governments, the banks, and developers proceeded without too much trouble. Local governments did not care about enforcing fund supervision as long as they were generating revenue from land sales; the banks could not be bothered that they were flouting regulations by allowing developers to “misappropriate” presale funds because local governments had approved the issue of those funds; and developers continued with their high turnover operations to rake in as much money as possible. When cases of stalled projects and mortgage boycotts broke out, local governments largely ignored the protests of buyers and resorted to various “stability maintenance” tactics (see point 2) to keep things in line.
The game of “musical chairs” being played by local governments, banks, and developers, however, is nearing a calamitous end as the regime sees sharp economic decline, the triggering of the property sector debt crisis, and evaporating foreign investor confidence and funds. Developers cannot sell houses and upkeep their high turnover operations when people lack funds to buy property and lose confidence in the real estate sector due to the debt crisis. With developers building less, if at all, land sales are impacted and local governments have much reduced access to an important source of revenue. Decreased revenue will see local governments struggle to sustain “stability maintenance” operations and suddenly find themselves answerable to the central government for allowing the wave of mortgage boycotts and unfinished projects to occur. Local governments and banks then rush to tighten supervision of presale funds, worsening the liquidity and debt situation of developers and perpetuating a vicious cycle.
2. In line with its “prefer left rather than right” approach to problem-solving, the CCP has long relied on “stability maintenance” operations to deal with social crises. To squash previous mortgage boycotts, the authorities resorted to heavy-handed suppression of protests and softer “stability maintenance” tactics like threatening to lower the social credit scores of protesting buyers and inconvenience them and their family members (jobs, studies, travel, etc.).
The CCP’s “stability maintenance” operations, however, are unlikely to be as effective today as compared to several years back.
For one, the Chinese people are becoming more desperate and willing to risk repercussions from the authorities as they strive to preserve their economic well-being amid rapidly deteriorating conditions in China. A case in point is a July 15 notice of work and payment suspension by small- and micro-sized businesses in Hubei Province who are suppliers of China Evergrande to governments at all levels in Hubei and banks. Those businesses said that they have been struggling to survive since Evergrande failed to make payments on its overdue commercial papers in July 2021, and some of them are now on the verge of bankruptcy. The businesses added that they are henceforth boycotting all payments of loans and arrears owed to the banks, and would “rather be blacklisted than pay up.”
Chinese consumers have also been reducing their household debt ratios, taking out fewer loans or repaying them earlier, and growing their “precautionary savings.” According to People’s Bank of China data, the net increase of mid- and long-term loans to households at the end of June over the trailing twelve months (TTM) was 6.6 trillion yuan, a decline of 2.4 trillion yuan (down 36.3 percent) from a year ago. Concurrently, the net increase of time and other deposits of households over the TTM at the end of June was 10.8 trillion yuan, an increase of 37.5 percent (2.9 trillion yuan) from a year ago. Meanwhile, the proportion of the net increase in household time and other deposits to new household deposits also increased nearly 10 percent from a year ago to 84.7 percent at the end of June.
With people losing faith in developers, financial institutions, and the government, the CCP authorities cannot casually resort to “stability maintenance” tactics to dissuade them from suspending mortgage payments without worsening the situation. Confidence in the government would plummet further, and people would be even more hesitant to take out loans and buy houses; there are presently not many among the 1.4 billion Chinese who are better positioned to purchase property, as we previously analyzed. Declining home sales would in turn undermine government efforts to rescue the property market, further aggravate the real estate sector debt crisis, potentially trigger systemic risks in banks, convince foreign investors to step up their exodus from China, and upend the Chinese economy on the whole.
However, the CCP authorities cannot completely turn away from “stability maintenance” tactics in dealing with the unfinished project-mortgage boycott crisis. Allowing wave after wave of mortgage boycotts to happen without pushback will sharply and quickly worsen the property sector debt crisis and financial contagion. China’s financial system will unlikely be able to withstand the rapid and concentrated expansion of financial risks, and the CCP will struggle greatly to cope with the resulting social unrest.
We believe that the CCP authorities could look to “delay and wait for change” (以拖待變) while offering up carrots and sticks to various parties as a means of “maintaining stability.” For instance, measures could be introduced to support some homebuyers and suppliers, and banks could allow a grace period for buyers to make mortgage payments during which their social credit scores would not be impacted. Concurrently, the authorities could seek to track down and intimidate mortgage boycott and protest leaders. Through such measures, the CCP will be looking to “trade [social] space for time,” and forestall a concentrated outbreak of debt and payment problems long enough for the economy to recover and gradually dilute the regime’s financial risks.
With the global economy heading towards recession, greater financial risks are still to come the PRC’s way. We believe that the CCP’s effort to “delay and wait for change” will only allow the accumulation of financial and political risks with no imminent redress, and a greater worsening of the current crisis.
3. As we noted in point 1, the root of the problem with mortgage boycotts over stalled projects can be traced all the way up to the central government. In fact, most economic issues in China today are downstream from CCP elite politics, and the core issue of elite politics is factional struggle in the Party elite. Unless resolved quickly, the unfinished project-mortgage boycott problem is a ticking time bomb for Xi Jinping and the CCP regime.
As the problem festers, the Xi camp and its factional rivals will undoubtedly look to blame each other for causing it. Disagreements in the Party elite over how to deal with the property sector crisis have already been reported by overseas media. An April 26 report by Financial Times noted that Chinese regulators led by PRC vice premier Liu He were in favor of easing restrictions on property purchases to prevent the entire financial system from going under. Meanwhile, vice premiers Han Zheng and Hu Chunhua prefer to maintain pressure on developers by tightly regulating how they can deploy project revenues; supporters of Han and Hu argue that there are “always healthy banks to bail out troubled ones.”
Han Zheng is a Jiang faction associate and Hu Chunhua is with the Communist Youth League faction (“tuanpai”), while Liu He is Xi’s longtime friend and ally. From their respective vice premier portfolios, the stance that Liu and Han are taking on property policy also suggests neither of them wants problems in their respective area of responsibility (Liu: finance; Han: housing and construction). The ongoing mortgage boycotts and stalled project problem will almost certainly lead to more friction in the Party elite, and leaves open opportunities for Xi’s rivals to undermine the Xi leadership.
Elite politics aside, the Xi leadership has to deal with the CCP officialdom’s usual self-destructive behavior, including various departments taking action that transfers risks to other departments, official inaction (不作爲), attempts to cover up the problem that inadvertently worsens the situation, etc. The various political issues will further erode Xi Jinping’s “quan wei” (authority and prestige) and the political legitimacy of the CCP, which in turn will affect Xi’s quest for a norm-breaking third term at the 20th Party Congress and getting his preferred senior officials into key positions.
