SHANGHAI: Investors dumped China's banking and real estate stocks on Thursday (Jul 14), fearing deepening trouble in the property sector would begin to hit the financial system as a wave of homebuyers refused to repay mortgage loans for delayed projects.
Bonds of Chinese developers were also sold off, as confidence in the sector, already wrecked by the Evergrande Group crisis, continues to wane.
Over the past few weeks, a growing number of homebuyers across China have collectively threatened to halt mortgage payments to banks until developers resume construction of pre-sold homes, according to official newspapers and social media.
The movement, which appears to be gaining traction, threatens to kill a nascent recovery in the property sector and could trigger government intervention.
"The event will likely spread, and it shows there is still a lot of froth in the real estate market," said Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management.
The CSI300 Bank index fell as much as 3.3 per cent, hitting its lowest level since March 2020, while Hong Kong's financial shares lost 1.5 per cent. Chinese developers in both the markets also fell sharply.
The sectors' bearishness weighed on the broader market. China's benchmark index ended flat, while Hong Kong's Hang Seng index closed 0.2 per cent lower, despite strength in tech shares on Thursday.
"People are worried this may hurt bank loans and affect other, not-in-trouble projects," said Steven Leung, executive director of institutional sales at brokerage UOB Kay Hian in Hong Kong.
The movement had spread to many Chinese provinces and involved more than 100 property projects, real estate consultancy CRIC said in a comment on Thursday, cautioning against "systemic risks".
Smaller lenders suffered strong sell-offs.
China Merchants Bank and Industrial Bank dropped as much as 6.3 per cent and 3.6 per cent respectively.
"China's property downturn may finally adversely affect onshore financial institutions after hitting the offshore high-yield dollar bond market," Nomura chief China economist Ting Lu wrote.
Disorderly deleveraging could lead to "rising non-performing loans for banks, which sit at the centre of China's financial system".
CLSA analyst Alvin Wong said he remained cautious on the near-term outlook for the property sector, despite recent stimulus measures.
"We believe the event might further dampen home buyer sentiment, and hence there is a lower chance of a sales recovery in the near term."
China-listed developers Gemdale and Greenland Holdings slumped more than 4 per cent, while Hong Kong-listed Longfor Group tumbled 5.4 per cent to a four-month low.
Investors also shun Chinese property bonds.
The CSI Real Estate Bond Index fell to the lowest level in nearly four years, while an index tracking Chinese high-yield bonds hit record lows.
The "collectively stopping mortgage payment" movement will prod the government to step in, and ensure home delivery to buyers, Guotai Junan Securities predicted on Thursday.
Nomura estimates developers have only delivered around 60 per cent of homes they pre-sold between 2013 and 2020, during which China's outstanding mortgage loans rose by 26.3 trillion yuan.
"The failure of a rising number of developers to deliver homes in a timely manner is a real problem ... at the moment," Nomura wrote.