Global investors on edge as China faces $9.2 trillion ‘flashpoint’

China’s multi-trillion dollar exposure to the property sector has the country headed for a potential flashpoint that could send shockwaves around the world, according to a leading Asian finance analyst.

Ajay Bagga, a former Executive Director of OPC Asset Solutions, says the situation has global investors on edge, with banks, metal prices and property developers all impacted.

“In the past year, 28 of the top 100 China property developers defaulted or asked their debt holders for extensions,” Bagga said.

“They account for about 20% of China’s total property sales (and) money is even tighter now.”

Worsening crisis

Bagga says in the first half of 2022, property sales fell 72% compared to the same period last year and expects the situation could get much worse as more homebuyers boycott mortgage payments on stalled projects.

“Chinese banks have about 62 trillion yuan (US$9.2 trillion) of exposure to the property sector (and) more than half is in the form of mortgage loans,” he said.

“As homebuyers refuse to pay mortgage instalments on over 100 stalled projects, this is becoming a potential flashpoint.”

Bagga says homebuyers in China are refusing to pay the mortgage on properties they’ve bought but that their financially strapped developers can’t finish and that some say that they will only resume payments when construction restarts.

Global impact could be severe

According to credible reports, Chinese homebuyers across 22 cities are refusing to pay mortgages.

“China’s banks have detailed 2.11 billion yuan (US$312 million) of loans at risk to the increasing number of homebuyers refusing to pay mortgages on unfinished homes,” Bagga said.

“(There are now fears of) a potential spillover into the wider financial sector.”

Tracey Ryniec, an equity strategist with Zacks Research, has echoed his concerns.

“It’s amazing to me that everyone is focused on the US having an 2008-style recession when it is China who is flashing warning signs and appears to be unraveling,” Ryniec said.

“Their leadership also not tested for an actual financial crisis.”