China moves to stave off crisis of confidence in banks amid mortgage strike, freezes

The ruling Chinese Communist Party (CCP) is moving to dampen concerns about a banking crisis amid an ongoing mortgage repayments strike and widespread protests over frozen accounts at rural banks.

Several cities in the central province of Henan set up task forces to address the issue of unfinished housing projects, the Global Times newspaper reported, following widespread concerns over the systemic risks posed by mortgage defaulters.

Authorities in Henan’s Pingdingshan city were finding ways to kick start unfinished projects, while Gongyi city announced on July 14 that three stalled projects in the city had been “properly resolved,” the paper said.

“The accelerated moves by local authorities come as mortgage defaults in some Chinese cities, including those in … Guangdong … Henan and Hunan provinces, have raised concerns at both home and abroad,” the paper said.

“Risk management mechanisms are generally deemed strong enough to withstand the risk,” it said of the banking sector.

Financial markets commentator Chai Xin said the mortgage repayments strikes stem in part from unfair clauses in the off-plan, or presold, sector of the property market.

“Almost all of them contain overlord clauses, which don’t give buyers any legal protection, and allow banks to use your other assets [to secure the mortgage], should the mortgaged property lose value,” Chai told RFA. “This doesn’t really happen anywhere outside China.”

Chai said the CCP is very worried that the mortgage repayment strike will have a knock-on effect on public confidence in the banking system.

“The suspension of mortgage repayments isn’t going to have a huge impact on the banks’ huge assets,” he said. “But the thing the banks are most worried about right now is wavering public trust,” he said.

“If public confidence in the banks is shaken, then they will have a big problem.”

‘Manageable overall’

Chai said if the mortgage strike ends up prompting bankruptcies among property developers, that could also have a big impact on the banks.

To date, 15 banks, including the five biggest banks in China, have issued announcements to the effect that the risks from the mortgage repayments strike are “controllable” or “manageable overall.”

The move to reassure the public comes after thousands of people protested outside the Shaanxi branch of the China Banking and Insurance Regulatory Commission (CBIRC) in the northern city of Xi’an on July 14, calling for an investigation into bank loans to property developers, some of whom have been transferring funds overseas.

A manager in the personal loan department of the Shenzhen branch of the Industrial and Commercial Bank of China (ICBC), who gave only the surname Li, said some developers have been taking the money needed to finish housing projects out of the country.

“The developer will say, we can’t go on, this project can’t be completed, but that unfinished project is itself mortgaged, built with a loan borrowed from the bank,” Li said.

“[They might take out a] loan of 400 million yuan, 100 million of which would be used for basic development project, and they keep selling off-plan [before completion],” she said. “[But] many developers have already transferred those funds overseas.”

“If the housing developer fails to deliver the building on time, the building will be unfinished,” Li said. “In the loan agreement between the buyer and the bank, if there is a problem with property used as collateral, they can include your existing assets to recover the debt.”

“But if this becomes very widespread, the banks won’t be able to withstand it,” she said.

Call for patience

Meanwhile, a CBIRC official called on depositors at four rural banks in the central province of Henan to “be patient” and wait for compensation.

“Police have identified the main facts of the case and discovered … that Henan New Fortune Group manipulated five village banks in Henan and Anhui to illegally absorb public funds through internal and external collusion, use of third-party platforms and fund brokers, tamper with original business data, and cover up illegal behavior,” the official said.

“The vast majority of ordinary customers of [these banks] have no knowledge or understanding of the suspected criminal behavior of New Fortune Group, and have not received additional high interest or subsidies … and their capital will be returned in batches,” the official said, adding that regular depositors with savings of less than 50,000 yuan would be refunded first.

“This is a heavy workload because there are large numbers of people involved … so please wait patiently for follow-up announcements,” the official said.

The official said CBIRC also “supports local governments to more effectively promote guaranteed property handovers by developers in a bid to address the mortgage repayments strike.

“Banks should insist on finding out the truth of the situation … and on precise implementation of policy, and actively plan to solve the hard funding gap in a reasonable manner,” the official said in comments reported on the CBIRC official website.

Since the protests began over the withdrawals freeze at the Henan rural banks, customers have also reported that their bank cards have been frozen or restricted by other banks in Beijing, Shandong, Hainan and other provinces and cities.

One newspaper quoted a depositor in Shaanxi as saying that his ICBC savings card wouldn’t let him withdraw or transfer his money, only deposit it.

The Securities Daily quoted several banks as saying that cards are generally restricted because of suspected money-laundering or other illegal activities, amid reports that Chinese banks have stepped up scrutiny of dormant accounts with no activity for three years or more in recent years.

Liquidity fears

Independent economist He Jiangbing said some dormant accounts are used for criminal activities, something that can happen anywhere in the world.

“The thing the banks fear most is a run, but what they are doing now and the news that is coming out is sending things in that direction,” He said.

Economic commentator Jin Shan, a pseudonym, said the restrictions on cards does point to an underlying crisis in China’s financial system.

“The financial system has poor capital turnover and can’t cope with demand for liquidity,” Jin told RFA. “In the background is the bigger picture of the long-term economic downturn, caused by [the zero-COVID policy].”

“This fatal blow to the economy results in a loss of [liquidity], as well as making bank deposits fall at the same time.”

“The large state-owned banks are a bit more robust, so the problems occur later, but they have also been restricting withdrawals, through quotas, or requirements to make appointments for withdrawals.”

Jin said restrictions on withdrawals could fuel a systemic banking crisis in China, with the real estate industry at the heart of the issue.

Translated and edited by Luisetta Mudie.