AS if the pandemic woes and the Ukraine-Russia war fallout were not enough, bad news from the Chinese real estate and banking industries added more fuel to the fear of a world recession.
Bloomberg reports a Sanford C. Bernstein Co. division, saying that “30 real estate developers with $1 trillion in liabilities” in the world’s second-largest economy (China) have defaulted on their obligations. Another report says 28 of the top 100 real estate developers have run aground.
Sales of property in China for the first half of 2022 plummeted 72 percent with the real estate developers burdened by a $9.2-trillion debt, half of which are exposed to mortgages.
Both due to the unemployment (Covid-related) issue and the inability of the real estate developers to deliver the real estate properties (subject to the mortgage), there is an ongoing “mortgage strike” involving 203 projects covering a wide swath of 86 Chinese cities. People simply just voluntarily refused to pay their mortgage dues.
Among the biggest victims is Ever Grande, one of the two biggest real estate Chinese real estate developers. An estimated 50 million homes have allegedly been foreclosed but the softening of prices translates into “negative equity” on the value of the collateral.
This is where the state’s biggest problem arises when the real estate bust leads to the breakdown (as well) of the Chinese financial system. Cracks have been showing for the last many months already and, if unabated, can bring the Chinese economy into deeper trouble. It is said that at least one-third of the banking system is exposed to the real estate industry in China.
The deteriorating asset quality of bank balance sheets prevents the banks from collecting loans and puts pressure on their cash flow management. Both major state-owned banks (at least four of them) and especially the 1,600 so-called village banks (accounting for 30 percent of the number of banks) are already rationing the withdrawal of deposits of customers.
This not only shakes the people’s confidence in the financial system but in some instances led to violent protests only to be dispersed by state and private security gangs. In some instances, not only were the number of withdrawing depositors limited, the amounts withdrawable were limited to only 1,000 renminbi per depositor.
If not contained, analysts say, this financial crisis can lead to political instability that China cannot afford given the already shaky foundations of her economy currently. There are plans to issue trillions in state bonds to inject liquidity into the banking system and different funding for infrastructure projects to save the drowning developers from sure death. Are they enough given the magnitude of the problem?
What is happening, observers note, is a de facto massive “bank run” over the wide geography of China and contained only by the violent power of restraint by the state. How long will this hold? Certainly, not forever; as people have to eat and live.
People may find it easier to surrender their political rights but it is not the same when it comes to ensuring their survival as humans.
To be sure, the real estate collapse is not the only culprit in the weakening of the Chinese banking system. Corruption is another contributor.
For instance, some 63 banking leaders of 100 rural banks have already been arrested for unethical banking practices. One president of a major bank was replaced by the vice mayor of the locality it was domiciled for the same reason.
There were illegal auctions of bank shares sold at gravely great discounted prices to shore up liquidity. Major shady bank mergers were done with overseas financial institutions but were meant largely to launder out money off China, to favor individual Chinese stakeholders. A prominent banker Y.I. allegedly fled to the US after embezzling billions in “quasi deposit” money from individuals he slyly convinced to part their money with but not recorded as “official deposits” of his own bank. And so on.
In the majority of the cases, the transactions were done online, making the tracing more difficult in the absence of vouchers and other paper trail evidence.
It has been 14 years since the “subprime mortgage collapse” in the US that reportedly resulted in $17 trillion in losses, all told, and saw the collapse of Lehman Brothers. A serious threat to the Chinese financial system staring at Beijing’s face is of similar nature.
The timing could not be any worse with new variants of the virus again threatening and the Ukraine-Russian imbroglio showing no let-up yet. If the China situation implodes, a recession becoming real will no longer just be a prophecy. It is a fulfilled one.
Zoilo “Bingo” P. Dejaresco, a former banker, is a financial consultant and media practitioner. He is a Life and Media member of Finex. His views here, however, are personal and do not necessarily reflect those of Finex. E-mail email@example.com. Know more about #FINEXPhils through www.finex.org.ph.