The sustainable investor for a changing world

Front of mind | Article - 6 Min

The risks around China’s grassroots mortgage ‘boycott’

China is seeing rising numbers of homebuyers stopping their mortgage payments to banks because cash-strapped developers are not delivering the homes they bought off-plan. The question is whether this mortgage ‘boycott’ will result in systemic risk pulling the rug from under the entire financial system.  

To give an idea of the scale, mortgage loans in China have grown quickly and now account for over 20% of total bank loans (see Exhibit 1). Over the last two decades, developers have been using presales extensively as a major source of funding for their projects. The ratio of presales (i.e. the selling of homes off-plan) to total new home sales rose steadily from about 58% in 2005 to almost 90% in 2021.

Meanwhile, developers’ reliance on home sales (including presales) for financing rose from less than one third of their total financing in 2008 to 53% in 2021.

Their reliance on bank loans dropped from almost 20% to just 11%, according to industry data, as land sales revenues became an easier source of financing than bank loans.

The size of China’s mortgage market almost doubled between the first half of 2017 and the first half of 2022 to RMB 45 trillion.

In many cases, developers receive government licences to sell homes right after the foundations of buidlings were laid. The presale model has increased developers’ leverage significantly by allowing them to access cash quickly to buy more land and then use that land as collateral to borrow more.

However, liquidity problems arose when new home sales, and hence revenues, dropped sharply during the recent property market downturn. The government’s restrictive property financing policy aggravated the liquidity squeeze. Cash-strapped developers reacted by stopping many pre-sold projects, prompting the buyers of those properties to protest by not paying their mortgages.

Rising mortgage delinquency could create a contagion risk should crumbling homebuyer confidence reduce property sales, forcing more developers to suspend projects. This could lead to a vicious circle of even lower confidence and more mortgage boycotts, with defaults in the offshore US dollar bond markets (where many developers have borrowed heavily) and an increase in non-performing loans at local banks.

Risks still manageable

Attempts to estimate the impact of the mortgage boycott are difficult because the situation is still fluid and data quality is hard to find. However, official and public data gives some idea of the potential systemic risk.

According to broker estimates, the mortgages that are at risk accounted for about 2% of outstanding mortgage loans at the end of March 2022.1 With the total amount of mortgages outstanding in Q2 2022 at RMB 40.7 trillion, the risky mortgages would amount to RMB 813.2 billion.

Official data also shows that as of March 2022, the Chinese banking system had 

  • RMB 2.91 trillion in non-performing loans (NPLs)
  • RMB 5.85 trillion in loan loss reserves, implying an NPL coverage of 200.7%
  • RMB 172.41 trillion in total loans, implying an NPL ratio of 1.69%
  • RMB 173.1 trillion in risk-weighted assets and a 15% Tier-1 capital adequacy ratio, implying RMB 25.97 trillion in Tier-1 capital. 

If all of the risky mortgages became NPLs, they would increase banks’ NPL ratio by 0.47 ppt to 2.16% from 1.69% and reduce their NPL coverage ratio by 43.8 ppt to 156.9% from 200.7%.

How bad would this be?

Given that since 2019, Basel III regulation requires that a bank’s Tier-1 capital must be at least 8% of its risk-weighted assets, and that, including a capital buffer, the minimum capital adequacy ratio should be 10.5%, the Chinese banking system’s average Tier-1 ratio of 15% should be adequate.

Chinese banks only need RMB18.18 trillion in Tier-1 capital to satisfy Basel III. The March 2022 level suggests an excess capital buffer of RMB 7.79 trillion. Deducting the RMB 813.2 billion in expected mortgage boycott related NPL from this buffer, the system would still have RMB 6.98 trillion in Tier-1 capital in excess of the Basel III requirements (see Exhibit 2 for a summary).

The bottom line

Systemic risk stemming from the mortgage boycott is unlikely, although some individual banks could suffer, unless the problem spins out of control, pushing mortgage delinquencies beyond the amount of the capital buffer, i.e., if NPLs increase by more than RMB 7 trillion, or if the rising NPL trend triggers a collapse in confidence.2

Crucially, Beijing’s policy response to this problem has been swift, with the authorities offering solutions such as allowing mortgage payment holidays for the affected homeowners and mobilising banking, state-owned enterprise and local government resources to revive the suspended projects and ease developers’ funding shortages.3

Further easing of macroeconomic policy is also expected as the mortgage boycott trend is aggravating the downside risk to economic growth.


1 See “Housing Crunch Worsens”, Morgan Stanley Research, China Economics, July 13, 2022.

2 We have long argued that the odds for a systemic collapse in confidence leading to bank runs wreaking havoc on the Chinese system are close to zero. See “Chi Time: China’s Debt Vulnerability (II) – A Banking Crisis?” 22 November 2019.

3 See “Chi Time: China’s Growth Crosscurrents – What’s New?” 20 July 2022.


This material is issued and has been prepared by BNP PARIBAS ASSET MANAGEMENT Asia Limited (the “Company”), with its registered office at 17/F, Lincoln House, Taikoo Place, Quarry Bay, Hong Kong. BNP PARIBAS ASSET MANAGEMENT Asia Limited in Australia is an authorised representative of BNP PARIBAS ASSET MANAGEMENT Australia Limited ABN 78 008 576 449, AFSL 223418 (“BNPP AMAU”). This material is distributed in Australia by BNPP AMAU. This material has not been reviewed by the Hong Kong Securities and Futures Commission.

This material is produced for information purposes for wholesale investors only and does not constitute:

1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever or

2. investment advice.

This material makes reference to certain financial instruments authorised and regulated in their jurisdiction(s) of incorporation. No action has been taken which would permit the public offering of the financial instrument(s) in any other jurisdiction, except as indicated in the most recent prospectus, offering document or any other information material, as applicable of the relevant financial instrument(s) where such action would be required, in particular, in the United States, to US persons (as such term is defined in Regulation S of the United States Securities Act of 1933). Prior to any subscription in a country in which such financial instrument(s) is/are registered, investors should verify any legal constraints or restrictions there may be in connection with the subscription, purchase, possession or sale of the financial instrument(s). Investors considering subscribing to the financial instrument(s) should read carefully the most recent prospectus, offering document or other information material for further details including the risk factors and consult the financial instrument(s’) most recent financial reports. These documents are available from your local BNPP AM correspondents, if any, or from the entities marketing the Financial Instrument(s).

Opinions included in this material constitute the judgement of the Company at the time specified and may be subject to change without notice. The Company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.

Investments involve risks. Given the economic and market risks, there can be no assurance that the financial instrument(s) will achieve its/their investment objectives. Returns may be affected by, amongst other things, investment strategies or objectives of the financial instrument(s) and material market and economic conditions, including interest rates, market terms and general market conditions. The different strategies applied to financial instruments may have a significant effect on the results presented in this material. Past performance is not a guide to future performance and the value of the investments in financial instrument(s) may go down as well as up. Investors may not get back the amount they originally invested. The performance data, as applicable, reflected in this material, do not take into account the commissions, costs incurred on the issue and redemption and taxes.

All information referred to in the present document is available on

Related insights

14:46 MIN
Market weekly – Chinese equities – ahead of the curve
chi loDaniel Morris
2 Authors - Front of mind
27/04/2020 · 1 Min
Emerging market equities – reasons to expect another turning point
To access insights from our teams worldwide visit:
Explore VIEWPOINT today