In recent months, financial regulators in China have been pushing major banks, including Industrial & Commercial Bank of China Ltd., to tackle the growing issue of non-performing real estate loans. This aggressive directive comes amid rising concerns that the persistent property crisis could further damage banks’ financial stability and limit their ability to invest in sectors favored by the Chinese government. As competition intensifies and profit margins shrink, banks are feeling the pressure to act decisively.

Urgent Call for Action on Non-Performing Loans

According to insiders, some banks have responded by doubling their annual quotas for writing off non-performing loans at local branches. This move signals a proactive stance from policymakers who are increasingly anxious about the financial health of the banking sector. The urgency is clear: a significant portion of banks’ balance sheets is tied up in struggling real estate investments.

• 3.8 trillion yuan ($532 billion) in bad assets was disposed of by China’s financial sector in 2024.
• Loans to property developers represent a substantial part of this figure.

Trends in Real Estate and Banking

Fitch Ratings highlighted that Chinese banks have approximately 6% to 7% of their total credit allocated to property development loans, maintaining a non-performing loan (NPL) ratio of 4% to 5% in recent years. The strategic reduction of these loans could enable banks to redirect resources towards more profitable ventures.

Elaine Xu, an expert at Fitch, noted, “In the long run, this strategy should lead to healthier balance sheets for banks, freeing up resources for new business opportunities.” However, she cautioned that for some banks with low provisions for bad loans, a rapid increase in write-offs might negatively impact short-term profits and capitalization.

Strategies for Managing Bad Debt

To address non-performing loans, banks often opt for write-offs or sell these debts to specialized asset management companies. Recent statistics show that write-offs constitute about 50% of total bad loans, while sales to asset management firms account for 30% to 40%. Importantly, even after a write-off, developers retain responsibility for the charged-off debt, allowing banks to pursue recovery options.

Market Pressures Remain

Despite a shift in policy focus towards stimulating economic growth—boosting consumption, investment, and production—the real estate market continues to face challenges. Recent data indicates a decline in new home sales and investment in property development.

Bank of Communications Co., one of China’s largest state-owned banks, has raised concerns about the potential for additional bad loans stemming from the property sector. Fitch projects that the NPL ratio for property loans will remain stable at 4% to 5%, as emerging bad loans counteract efforts to expedite loan disposals.

Gu Bin, the vice president of Bank of Communications, remarked, “Cash flow for some developers hasn’t fully recovered, and project sales are still lagging.” This ongoing struggle indicates that many loans in the property sector may soon be classified as non-performing.

Positive Signals for the Future

On a brighter note, Bank of China Ltd. reported a 2.6% increase in profits for 2024, with reduced impairment losses helping to counterbalance the pressure of declining interest rates. This trend could help lower the property NPL ratio across banks, aiming to restore homebuyer confidence in the real estate market.

An increase in the pace of property NPL write-offs could also facilitate quicker debt restructuring and asset sales by developers—critical steps toward a market recovery. Raymond Cheng, head of property research at CGS International Securities, emphasizes that the commitment from Chinese authorities and financial institutions reflects a recognition of the challenges ahead, with a belief that the situation is manageable.

Cheng concluded, “This indicates that the property industry is nearing its bottom, which may reassure investors.” As the sector navigates these turbulent waters, the focus remains on stabilizing the economy and fostering renewed growth in the real estate market.