The mortgage repayment problem is crucial for the Chinese banking sector, as it is the property market that has been one of the important factors in the growth of the local economy over the past decade. But now, according to the Wall Street Journal, the Chinese have begun to refuse to pay for unfinished development projects. The surge in interest in the country's housing has led to pre-sales of properties and mortgage payments months or years before the actual buildings are completed. However, in 2020, the government has cracked down on the country's rapid indebtedness of developers and set hard limits, leading to a slowdown in construction and resentment from payers who don't want to wait any longer for their properties. Estimates speak of a projected loss of USD 300 to 350 billion if borrowers stop paying for all the apartments and houses under construction.
The debt trap
Another ticking time bomb may be the aforementioned construction programme under an initiative called the New Silk Road, which China launched nine years ago. However, it is now uncertain whether the countries it has provided aid to through this project will be able to repay their obligations. In general, China has long faced criticism for providing poor countries with unfavourable loans and trying to use the repayment problems that follow to strengthen its influence. Inability to repay often forces countries to make payments in the form of goods or land. The pitfalls of the problems of this 'instrument of global expansion' were already revealed in 2021 by an AidData study that described the problem of over-pricing, corruption and debt sustainability. However, considering the current economic situation the world is facing, the question arises whether China is 'inadvertently' creating a debt trap for itself in this way.
The pandemic has changed the rules of the game
The COVID-19 pandemic and the related restrictions have caused considerable economic problems for the developed economies, while the developing ones have been literally brought to their knees. The economic collapse of Sri Lanka, which has a debt to China of at least EUR 5 billion, is an exemplary model of where the situation could end up, and, according to world authorities, other countries such as Laos and the Maldives are at risk of falling into a similar situation. It is China that is one of the biggest creditors of these states. Default on the debts of other developing countries could cause major problems for it in the current situation, when the country's debt burden is rising sharply. The total debts of the state, companies and citizens combined could reach up to 275 per cent of GDP this year, according to estimates by Bloomerg.
One bad news after another
China has to deal with more negative news this year. In addition to the aforementioned problems, in April it saw the collapse of banks in the Henan region, where USD 6 billion disappeared and clients were suddenly unable to access their money. It was only after several protests that China's main banking regulator, the CBIRC, stepped in to compensate them. In addition, on 24 July, information appeared on the CBIRC's website that the regulator was also investigating an inspector from the Henan branch for disciplinary offences. Further details have not yet been made public. The logical outcome of the situation is the emerging questions and concerns about whether other banks in the local market may also default, which would exacerbate the current situation and add another wave of negative sentiment to the local Chinese market as well as the global market.
Olivia Lacenova, an analyst at Wonderinterest Trading Ltd.
