Weak home sales risk worsening Chinese banks' bad loans

Banks’ property loan exposure is expected to fall 6% amidst ongoing caution.

The ongoing property sector crisis has spread to surviving developers amidst weak home sales, which would further hurt China-based banks’ asset qualities, warned S&P Global Ratings.

“The post-pandemic recovery in the asset quality of Chinese banks has hit a wall,” the ratings agency stated in its latest report. “Weak home sales are hurting surviving developers and causing more debt restructuring in lower-tier cities.” 

S&P estimates the nonperforming loan ratio for property lending to peak higher at 6.4% in 2025. Property loan exposure, however, may fall to less than 6% of total loans in the 2024-2026 period, as banks are cautious about lending to this sector.

Ongoing strains in the local property sector have spread to surviving developers, S&P warned. This could increase the burden on some banks, because more debt restructuring of local government financing vehicles in weak regions could ensue if poor land sales hurt fiscal revenues.

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On the other hand, most micro and small enterprise loans are now performing better in part thanks to the country’s push to promote access to financial services, as well as the moratorium imposed on repayments during the pandemic.

“Modest macro policy support and decent post-moratorium performance of micro and small enterprise loans are helping to counter stresses from the mainland's property market and stricter asset classification rules,” S&P said.

Overall, China’s banking sector is expected to report a non-performing asset ratio between 5.5% to 5.9% over 2024-2026, with the uneven economic recovery further hindering improvement in asset quality.