SHANGHAI -- Chinese banks' massive lending to the real estate sector looks increasingly likely to backfire on many as default fears mount -- and may ultimately make it harder for authorities to bail them out.
Aggregate lending by Chinese banks to developers came to 14.2 trillion yuan ($2.2 trillion) at the end of June, according to Moody's Investors Service. This accounts for 7.4% of total bank loans, Moody's says, and is equivalent to more than half of the 25.5 trillion yuan in net capital held by commercial banks in government data.
This exposure now leaves many institutions facing the risk of a capital shortage as debt-burdened developer China Evergrande Group and other real estate companies warn that they may be unable to repay bonds on time.
The problem becomes even larger when looking at other types of debt involving property. Citigroup estimates this broader category at roughly 130 trillion yuan, including 58 trillion yuan in loans with property as collateral, 34 trillion yuan in mortgages, 20 trillion yuan in real-estate-related financing to local-government-affiliated companies, and 2 trillion yuan in real estate loans from shadow banks.
Investors fear that if China's real estate bubble bursts, widespread defaults could leave banks in hot water.
A China Construction Bank executive assured investors Friday that the state-owned lender has "relatively small" exposure to Evergrande and that the risk is "controllable." The bank's share price slumped to a roughly four-year low in August, and the total market capitalization of China's big four state-owned banks has slipped to nearly 40% under its 2018 peak.
Some lenders are more deeply entangled in the sector. Real estate makes up accounts for more than 10% of corporate loans at six of the 41 banks listed in Shanghai and Shenzhen, including Shanghai Commercial and Savings Bank, China Zheshan Bank and Ping An Bank, according to Shengang Securities.
And Evergrande is not the only developer struggling to repay debt.
Hong Kong-listed China Properties Group said Friday that a subsidiary had failed to repay the principal on a $226 million bond. Second-tier Sinic Holdings has warned that a default "will likely occur" on bonds set to mature Monday. There remains uncertainty over whether Central China Real Estate can meet the Nov. 8 maturity date for a $400 million bond issue.
The situation is dire enough that authorities have already begun injecting public funds into failing banks. In 2020, China allowed capital raised by local governments for infrastructure projects to be used to shore up small and midsize lenders. But the 200 billion yuan earmarked for this effort was quickly burned through.
The turmoil could affect China's ability to support its financial system with public funds as it has in the past. Both central and local government finances are closely bound up with the real estate market.
Land sales make up a sizable chunk of government revenue. Income from such transactions at the central and local levels totaled 8.4 trillion yuan in 2020, equivalent to more than half of total tax revenue.
But selling land has gotten tougher as market conditions have worsened. Revenue from land sales shrank nearly 20% on the year in August, according to the Ministry of Finance, as cash-strapped developers have steered clear of high bids. A land auction by Beijing this month got no bids for 26 of the 43 lots, and the city government was forced to extend the deadline.