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Daily Archives: July 14, 2022

Music Video: Ain’t No Mountain High Enough

More Chinese Homebuyers Refuse to Pay Mortgage Loans Amid Contagion Fears

A rapidly increasing number of disgruntled Chinese homebuyers are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s real estate woes and stoking fears that the crisis will spread to the wider financial system.

Homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, according to researcher China Real Estate Information Corp. That’s up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen.

“The names on the list doubled every day in the past three days,” Chen wrote in a note published Thursday. “The incident would dampen buyer sentiment, especially for presold products offered by private developers given the higher risk on delivery, and weigh on the gradual sales recovery.”

The delayed projects make up about 1% of China’s total mortgage balance, according to Jefferies. Should every buyer default, that would lead to a 388 billion yuan ($58 billion) increase in non-performing loans, Chen said. The report didn’t give any estimate for how many buyers are snubbing repayments.

Some major Chinese banks rushed to respond during trading hours on Thursday as the CSI 300 Banks Index fell as much as 3.3%. State-owned Agricultural Bank of China Ltd. said it held 660 million yuan of overdue loans on unfinished homes, while smaller rival Industrial Bank Co. said 1.6 billion yuan of mortgages were impacted, of which 384 million yuan have become delinquent. China Construction Bank Corp., the nation’s largest mortgage lender, said overall risks are controllable as its exposure to delayed projects is small.

The payment refusals underscore how the storm engulfing China’s property sector is now affecting hundreds of thousands of average citizens, posing a threat to social stability ahead of a Communist Party Congress later this year. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults. A Bloomberg Intelligence index of Chinese developer stocks slid as much as 2.7%.

Analysts believe that a drop in home values may be another driver for the refusal to meet mortgage payments. “Investors are concerned about the spread of mortgage payment snubs to buyers, simply due to lower property prices, and the impact on property sales,” Chen wrote.

Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, Citigroup Inc. analysts said in a note on Wednesday. China’s home prices fell for a ninth month in May, with June figures set for release Friday.

The crisis engulfing Chinese developers is reaching a new phase, with a debt selloff expanding to firms once deemed safe from the cash crunch, including Country Garden Holdings Co., the largest builder by sales.

While rising non-performing loans for Chinese banks are “manageable” for now, “more risk events are likely to come, at the backdrop of China’s growth slowdown, residents’ expectation of worse future income, and shrinking property sales,” affecting China’s social stability, Jefferies’s Chen said.

Presale Risks

Nomura Holdings Inc. analysts said the refusal to pay mortgages stems from the widespread practice in China of selling homes before they’re built. Confidence that projects will be completed has weakened as developers’ cash woes intensified.

Even before the crisis, developers only delivered around 60% of homes they presold between 2013 and 2020, while outstanding mortgage loans rose by 26.3 trillion yuan, Nomura analysts including Ting Lu wrote in a note Wednesday.

“Presales carry mounting risks for developers, homebuyers, the financial system and the macro economy,” Lu wrote. Failure to build homes on time reduces households’ willingness to buy new properties, and rising raw material prices may mean funds from presales are insufficient to construct them.

“We are especially concerned about the financial impact of the homebuyers’ ‘stopping mortgage repayments’ movement,” Ting wrote. “China’s property downturn may finally adversely affect onshore financial institutions after hitting the offshore high-yield dollar bond market.”


Source : Bloomberg


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Homebuyers in Multiple Cities Go on Mortgage Strike Over Delayed Projects . . . . .

Charts: The Annual Inflation Rate in the U.S. Accelerated in June 2022

Highest since November of 1981

Real wages fell for the 15th month in a row

Source : Trading Economics, The Big Picture and Bloomberg

Chinese Local Govt Financing Units Seek Unorthodox Route to Raise Funds

Samuel Shen and Andrew Galbraith wrote . . . . . . . . .

Shut out of the bond market and spurned by banks, a growing number of cash-starved Chinese local government financing units are tapping a loosely regulated funding channel to directly court yield-hungry retail investors.

Over recent years China has embarked on a deleveraging campaign to reduce systemic risks after Local Government Financing Vehicles (LGFVs) accumulated trillions of dollars worth of debt since the 2008 financial crisis.

Last year, Beijing further tightened the screws on lending to LGFVs, which are investment companies that build infrastructure projects on behalf of local governments.

The squeeze has sharply driven up “direct financing” debt products by LGFVs – typically registered via loosely-regulated local asset exchanges and sold to the public via the internet with a hint of government guarantee – over the past year.

LGFVs are offering to pay yields of more than 8% – roughly triple the benchmark lending rate – revealing their desperation to raise cash and meet political mandates to support a COVID-hit economy.

One such firm is Weifang Binhai Tourism Group Co, which is selling investors 500 million yuan ($74.04 million) of debt yielding 8.5%-9.5%, to fund engineering projects and replenish cash, according to a sales pitch.

The company wouldn’t have chosen this path “if we could sell bonds at a lower cost – we are not stupid,” said Liu Yang, a manager in charge of financing for Binhai Tourism, owned by the city government of Weifang, in eastern Shandong Province.

Liu says many LGFVs are struggling, as they are unable to raise money from the bond market or through trust firms. The major hit came last year when regulators curbed bond sales by LGFVs and restricted banks from providing loans to such state firms, and “all banks were rushing to call back loans”.

Weifang Binhai is not alone. About 50 LGFV debt products are on sale via investment website Junxing Wealth, luring individual investors with indicated annual returns of 8.0-10.2%. More such private investment products are being promoted via the internet, or through social media.

There’s no official data on the total size of such products, as they are not sold through regulated financial institutions. At least 245 such debt products have been sold since last year to quench LGFVs’ funding needs, according to an estimate by Huaan Securities. An LGFV typically raises several hundred million yuan via such a debt scheme.

INNOVATIVE

“For LGFVs in economically weak regions, or owned by county-level, district-level governments, it’s tough for them to refinance through bond issuance, so they must come up with something innovative,” said Ivan Chung, associate managing director at Moody’s Investors Service.

Risk averse investors typically shun LGFVs in China’s southwestern, northwestern and northeastern provinces, as well as lower-rated bonds, Chung said.

Net bond sales by AA-rated LGFVs more than halved so far this year, according to Minsheng Securities.

But the practice of LGFVs selling private debt to the public via the internet, with a veiled promise of government guarantee, is raising eyebrows.

In a brochure promoting debt sold by Luoyang Gaoxin Industrial Group, little was mentioned about the issuers’ financial health. Instead, descriptions centred on the financial strength of the Luoyang city government, and the central Henan province, where the LGFV is based.

“This doesn’t look right. Any LGFV can issue debt, but the point is, you cannot hint that the local government is behind your back,” said Rocky Fan, economist at Guolian Securities, adding such promotion violates central government’s ban on implicit guarantees.

Such LGFV debt schemes also risk violating rules on private investment products, which must only sell to qualified investors, while limiting the number of investors to 200, said a lawyer who declined to be identified as he’s not authorised to speak to the media.

These products “appear to be illegal fundraising,” the lawyer said.

Wealth management sold through banks, trust firms and brokerages would be subject to much stringent scrutiny. A debt crisis in the property sector has already led to a years-long crackdown on illicit financing.

The Luoyang city government could not be reached for comment. China’s securities watchdog didn’t immediately reply to Reuters’ request for comment.

REASON TO EXIST

As debt-control deepens, a growing number of LGFVs will likely default on private debt in 2022, S&P Global Ratings predicts.

Bincheng Investment, an LGFV seeking to raise 100-200 million yuan from individual investors at yields of 8.2-9.0%, says borrowing from individuals makes sense.

“This new financing tool is legitimate, and meets the needs of individual investors,” said an official of Bincheng’s finance department, declining to be named.

“There are many products in the market offering much higher interest rates than those of bank lending … and there is a reason for them to exist.”


Source : Reuters

Chart: Canada Central Bank Raised Interest Rate by 1%

Largest Bank of Canada rate hike since 1998

The Bank of Canada joins more than 30 other central banks around the world that have raised interest rates by a full percentage or more this year.


Source : Bloomberg