Xi faces unaccustomed headwinds in 3rd term bid

On July 22, Evergrande announced it had dismissed its chief executive officer Xia Haijun and chief financial officer Pan Darong as well as Ke Peng, executive president of its subsidiary Hengda Real Estate Group, for their role in amassing the company's borrowings of RMB2.7 billion (US$400 million), on which Evergrande defaulted last September. Shawn Siu and Qian Cheng have become the new chief executive officer and chief financial officer, the company announced.

"A mortgage rebellion by middle-class Chinese homeowners could force Xi Jinping to backtrack on his housing policy – a key pillar in his "common prosperity" vision – and more generally pledge significant changes to his quasi-Maoist policies of emphasizing Party-state control over the economy," said Enodo Economics.

"Homebuyers' recent choice to withhold mortgage payments, thus drawing banks into their dispute with property developers, could prove more effective in reining in China's lurch towards a command economy under Xi than anything his political rivals have been able to accomplish," Enodo Economics added.

"While the size of the mortgage rebellion is manageable for now, if it broadens to encompass well-off urbanites' overall frustration with Xi's attempt to lower house prices and redistribute income, the CCP will have a much more serious social problem on its hands," Enodo Economics warned.

At a press conference on July 21, Liu Zhongrui, an official of the China Banking and Insurance Regulatory Commission (CBIRC), said the CBIRC is working with other Chinese government bodies to ensure the delivery of completed property units, protect the people's livelihood and maintain stability in the property market. The CBIRC will guide banks to resolve funding shortages in order to enable property projects to be completed, Liu said.

The defaults will not directly affect Fitch-rated Chinese banks, with most disclosing that affected mortgage loans amount to less than 0.01 percent of their outstanding residential mortgage loans, said Fitch. "However, should defaults escalate, there could be broad and serious economic and social implications."

Even in a bearish scenario where the Chinese government fails to step in and ensure home delivery to buyers, at worst Chinese banks will endure a 2.4 percent hit on their profits, said the Morningstar report.

"We believe the mortgage issues will be small in scale and not post significant threats to the financial system, as the root cause of this problem is not a sharp deterioration in households' balance sheets, but fear over developers' liquidity," said Morningstar senior equity analyst Iris Tan.

"Investor sentiment for banks is extremely low, driven by separate events, including the Henan village bank incidents, trust product disputes, and mortgage issues, but we believe the media has overhyped risks in China's financial system and the possibility of a financial crisis," Tan said.

Protests over banks

In the past few months, bank depositors held demonstrations in Zhengzhou, the capital of the Chinese province of Henan over four rural banks in Henan which have frozen deposits, while a rural bank in another Chinese province, Anhui, also froze them. On July 10, hundreds of people protested against alleged corruption by local officials in Zhengzhou, according to media reports.

"The pushback by bank depositors demanding their life savings back and condemning government corruption is another manifestation of the huge challenges Beijing faces at present," Choyleva tweeted on July 20.