In spite of worries about a collapse in China’s property market, we think that the financial system will navigate the coming credit cycle if banks can buy time to resolve loan problems — and receive government support if needed.
Among China’s financial institutions, banks lend the most to the property sector: by 2013, they had provided Rmb9tn (US$1.46 tn), compared with an estimated Rmb5.4tn from the shadow-banking sector. For property developers, though, banks are not the main source of liquidity. Nearly 70 per cent of their liquidity comes from non-bank sources; 39 per cent from their own cash and 28 per cent from customer deposits, so they don’t rely too much on bank funding.
We think that this is a crucial point about the Chinese property market that many investors might miss: it’s not really over-leveraged, even though it is facing headwinds in demand and supply.