The Chinese authorities’ drift on managing bad debts feels eerily like the impending subprime crisis in 2008.

It is spreading like wildfire. Home buyers in China are refusing to pay the mortgage on properties they have bought but that their financially strapped developers can’t finish. Some say that they will resume payments only when construction restarts.

The protest involved more than 100 delayed projects as of July 13, up from 58 projects the previous day.

The frustrated buyers accuse the developers of misusing sales proceeds and the banks of failing to safeguard their loans.

China has never seen anything like this. As in the United States – until the 2007 subprime crisis – the possibility of troubles in the mortgage market was vanishingly small.

But this mortgage strike isn’t entirely unpredictable. Home buyers have every reason to be angry. Most of the projects were begun by developers who have defaulted.

China Evergrande Group led the pack, accounting for an estimated 35 per cent of the total projects that faced mortgage revolts, data compiled by capital management company CLSA of Hong Kong shows.

One such project in eastern Jiangsu province was launched before the COVID-19 pandemic. Construction has been suspended since August, while property values in its neighbourhood have come down by about 10 per cent. In other words, not only did the affected households see their wealth dip, they can’t move in and enjoy their new apartments either.

Over the years, with consent of local governments, the likes of Evergrande and Country Garden Holdings fed the residential housing boom through a pre-sales model: apartments are bought long before they are completed. Now the builders don’t have money to finish these projects.

Granted, developers’ debt woes were met with protests in the past – from suppliers, employees, all the way to hapless retail investors who had bought their wealth management offerings. But this new development is something entirely different.

It opens a Pandora’s box and poses a direct threat to the stability of Chinese banks. The Ministry of Housing and Urban-Rural Development held talks with financial regulators and major banks last week to discuss the mortgage boycotts.

Unless President Xi Jinping’s government stops this stampede, a collapse of the banking system on the scale of Lehman Brothers in the US in 2008 is very much on the cards. China is unprepared for such a big chunk of its bank loans to go sour.

According to Autonomous Research, banks have about 62 trillion yuan ($9.1 trillion) of exposure to the property sector. More than half is in the form of mortgage loans. At China Construction Bank, one of the world’s largest banks, mortgages account for more than 20 per cent of total assets.

Until last week, China’s middle class were excellent customers, dutifully paying their monthly bills. The government’s social credit system – a national credit rating and borrowing blacklist – has worked well; bad credit can even hamper one’s ability to travel on high-speed rail. But what if some are just fed up and willing to walk away from their obligations?

We’re not talking about one or two delinquent developers. In the past year, 28 of the top 100 developers have defaulted or asked their debt holders for extensions, data compiled by CLSA shows.

Collectively, they account for about 20 per cent of China’s total property sales. Money is even tighter now. In the first half of the year, property sales plummeted 72 per cent from a year ago, further eroding their cash flow.

A CLSA monthly survey on the status of Evergrande projects gives us a glimpse of how many unfinished sites there are across China. As of June, more than half of Evergrande’s projects were under construction halts.

CLSA estimates that about 840 billion yuan in mortgages is tied to abandoned sites across China.

It is worth asking how we even managed to get to this point, especially for a government that is obsessed with stability.

All we have seen is policy inertia. Developers have been in distress for more than a year now, but there has been no progress in restructuring their finances. Local officials have been unwilling to make difficult decisions, write off bad debt and reach resolutions.

Unable to shed financial burdens, builders cannot focus on operations. They become zombies, and their construction sites turn into ghost towns.

In 2008, I worked at Lehman Brothers in New York and witnessed first hand how the subprime mortgage crisis dragged down the venerable bank – and threatened the entire industry. This environment is starting to feel eerily similar.


Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.