On Friday, December 2, credit rating agency Moody’s warned that China’s financial system might face rising risks due to the ongoing property crisis, notably smaller banks.
Reuters cited a report from Moody’s, saying, “Some buffers protecting the financial system are eroding, which would pose risks if the property downturn becomes protracted.”
The report noted, “Risks to the stability of China’s financial system are rising amid a contraction in the property sector and the country’s economic slowdown.”
As an effort to defuse the growing bomb of debts on its economy, Beijing in 2020 tightened financing rules by clamping down on excessive loans by property developers. The crackdown has hit the industry, causing home prices and sales to fall with a surging number of bond defaults, leading to a liquidity crunch.
The crisis deepened in June when hundreds of thousands of homebuyers started the mortgage boycott of unfinished projects in over 90 cities across China.
Officials have tried to rescue the industry by announcing a 16-point plan last month to support the troubled real estate sector. State-owned banks promised at least $180 billion in funding for developers.
Bloomberg, citing data from China’s central bank, the People’s Bank of China, reported in July that outstanding loans in the real estate sector increased 4.2% from a year ago to 53.1 trillion yuan ($7.9 trillion) as of June.
With bad loans of 2.9 trillion yuan at the end of March, China’s banking system might end up losing mortgages of over $400 billion in the worst-case scenario. According to Bloomberg, China’s home sales kept decreasing while housing prices dropped in November, challenging the regime’s effort to handle the crisis in the property market.