A growing number of desperate homebuyers across China withhold mortgage payments on unfinished projects, worsening fears of financial contagion in the country’s troubled real estate sector. Celebrities Jet Li and Zhang Yimou are eager to sell their properties. Investors are dumping China’s banking and real estate stocks and corporate bonds issued by property developers.

The escalating crisis engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability.

Chinese banks, already grappling with challenges from liquidity stress among developers, now have to brace for homebuyer defaults.

According to Griffin Chan, Citigroup Inc. analyst, the contagion is spreading to banks. Non-performing loans triggered by the wave of mortgage payment snubs could reach as much as $83 billion, about 1.4% of the outstanding mortgage balance.

Betty Wang, ANZ’s senior China economist, said, “What concerns us is if more home buyers cease payment, the spreading trend will not only threaten the health of the financial system but also create social issues amid the current economic downturn.”

Current affairs commentator, Qin Peng, stressed the issue with China’s housing pre-sale system. Property developers can borrow money from banks to buy land from the regime for housing projects. They then can pre-sale houses to collect money from the public. Banks will benefit not only from becoming developers’ lenders but also from selling mortgages to homebuyers. The regime gets its share from collecting taxes and selling land. It is down to homebuyers’ risk of stalled construction and low housing quality.

He believes the suspension of loans will spread nationwide, “There is a thunderstorm in the banking system. Although the suspension of loans will affect the credit of the owners, many people are so poor that they don’t care anymore.”

On July 11, nine Chinese Hong Kong-listed companies were kicked out of the Hong Kong Hang Seng Index, of which eight were real estate stocks. The movement, which appears to be gaining traction, threatens to kill a nascent property sector recovery and could trigger regime intervention.

The Ministry of Housing and Urban-Rural Development met with financial regulators and major banks this week to discuss the mortgage boycotts, Bloomberg News reported Thursday.

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