A battle of wits between some wealthy Chinese and the country’s lending banks over the issue of repayment of loans is bringing to the fore a fact the government is hesitant to admit– the zero-Covid restrictions of 2022 are still impacting the economy. Since early this year, Chinese banks are facing a new earnings challenge as growing numbers of homebuyers pay off their mortgages ahead of schedule, threatening lenders with the loss of years of anticipated interest income.
Chinese banks have also been cutting costs through such steps as reducing interest rates on deposits in order to lift their Covid-hit profits. The decline in interest income further encouraged bank customers to divert deposits to pay down debt.As a counter, many banks responded by capping early payments, concerned that they could squeeze revenue. In an online post, a customer recounted being told by a bank that requests to pay early could not be processed until August, given how many people were interested in doing so.
As a result, complaints against China’s banks surged in the January-March period as they tried to preserve their income by restricting early mortgage payments. A total of 104,909 consumer complaints were filed, up around 50% from the previous quarter, according to the National Administration of Financial Regulation (NAFR).Home loans were the major driver of this surge. Complaints regarding consumer lending increased 2.1 times to 59,827, making up the majority of the total for the first time since tracking began with the April-June quarter of 2020. The trend stems largely from the economic impact of the zero-Covid restrictions of 2022 – the returns on stocks and real estate are still sluggish and so, Chinese with extra cash in their hands tried to get ahead on mortgage payments.
The rush to pay mortgages early only appears to be growing. Medium- to long-term loans to households decreased by 115.6 billion yuan ($16 billion) on the year in April, according to the People’s Bank of China — the largest figure since tracking began in 2007.The government is unhappy with the situation. For, it exposes a chink in the country’s economy in recent months as borrowers cash out of disappointing investments or raise funds by taking out lower-rate business loans.
Reports from Hong Kong quoted Ding Shuang, chief economist for greater China and North Asia at Standard Chartered: “I’ve not heard of early repayment of similar scale before. It will certainly have a negative impact on the banks’ revenue.”
A director at China Merchants Bank in eastern Jiangsu province said there was “an obvious spike in early mortgage payments after Chinese Lunar New Year” in late January. To cope, he said his bank was asking customers to schedule appointments if they wanted to discuss early repayment.A banker at a branch of China Construction Bank in the southern city of Guangzhou said the lender shut down early repayment functions on mobile phones after a rise in such requests. Customers need to wait “a few months” to book a time slot at a branch so they can make such payments, the banker said.
According to media reports, early payments of residential mortgages benefit Chinese banks in the sense that they eliminate the possibility of credit losses. But they also eat into one of the more reliable streams of interest income for lenders.Banks in China do not publish early mortgage repayment figures, but overall mortgage balances slipped from 38.9 trillion yuan ($5.67 trillion) at the end of September to 38.8 trillion yuan at the end of last year, according to the People’s Bank of China.
Meanwhile, average home prices in 70 major Chinese cities have fallen year-on-year for 10 months straight, starting in April 2022, the National Bureau of Statistics says. That means people who buy homes for investment purposes have disappeared totally in the last two years.What’s worse is that the prices of new homes in China are rising very slowly this year. The government is concerned that this may be construed to mean that the country’s economic recovery is painfully slow.
Economists are already saying more policy stimulus may be needed to ensure the recovery stays on track after a batch of recent data showed imports contracted sharply, factory gate prices fell again and industrial output and retail sales missed forecasts.New home prices in April rose 0.4% month-on-month versus a 0.5% gain in March, according to Reuters calculations based on National Bureau of Statistics (NBS) data. The slower pace of home price gains, along with bearish data on Tuesday showing property investment and sales sharply falling, are raising doubts about the strength of the recovery in a sector crucial to the health of China’s economy. From a year earlier, prices fell 0.2%, the 12th month of decline in annual terms. Prices were down 0.8% in March.
Though the government is silent on the issue, an indicator of the worry the government faces was China’s housing regulator issuing a notice that requires local real estate brokers to reduce fees for housing transactions and leasing services to promote healthy development of the sector.