The Chinese Economy Is Facing A Unique Problem

Chinese banks are encountering a new challenge in their earnings as an increasing number of homeowners are paying off their mortgages ahead of schedule.

This trend poses a threat to lenders, as it results in the loss of anticipated interest income over the years, as reported by Nikkei Asia.

While official data does not provide a clear picture of the scale and impact of mortgage repayments, ground-level evidence suggests that it has been growing in recent months. Borrowers are opting for early repayments due to disappointing investments or to secure lower-rate business loans.

Bankers are expressing their concerns and implementing strategies to slow down the rush of repayments and retain mortgages on their books, at least temporarily.

Some banks are requiring customers to schedule appointments for early repayment discussions, while others have disabled the option to make early payments through mobile banking apps.

The early repayment trend has caught the attention of economists and industry experts, who acknowledge its negative impact on bank revenues.

Mortgages are considered relatively safe loans for banks, with a low percentage classified as nonperforming. However, early repayments eat into the steady stream of interest income that lenders rely on.

Chinese mortgages are typically offered at rates slightly higher than the five-year loan prime rate (LPR). As the LPR has decreased in recent years, borrowers with older mortgages are paying higher interest rates compared to those with more recent loans. This has led to a sense of unfairness among borrowers.

To pay off their mortgages early, borrowers are resorting to various strategies. Some are redeeming wealth management products that underperformed due to the impact of COVID-19 restrictions on the economy. Others are taking advantage of lower-rate loans intended for business purposes, despite regulations prohibiting such activity.

Beijing's efforts to encourage lending to small and medium-sized businesses have led to increased competition among banks. Smaller banks, eager to secure business borrowers, have been offering attractive rates. For example, a Rural Commercial Bank is reportedly providing loans for business purposes to individual consumers at an interest rate below 4 per cent.

While official figures on early mortgage repayments are not publicly available, the total mortgage balances have slightly decreased. Additionally, average home prices in major Chinese cities have been declining year-on-year for ten consecutive months since April 2022.

In summary, Chinese banks are facing the challenge of increasing early mortgage repayments, which threaten their anticipated interest income. The trend is driven by borrowers seeking to cash out underperforming investments or take advantage of lower-rate loans for business purposes.

Banks are implementing strategies to slow down the repayment rush, while borrowers express frustration over higher interest rates on older mortgages.

Beijing wanted to loosen the interest rates to ensure people borrow more. However, the gamble has backfired, and people, instead, are using cheap credit to pay off the previous debt, taken at a higher rate of interest. Not only is this doing nothing to increase the consumer demand, it is now hurting the bank's revenues.

China's banks faced a significant increase in consumer complaints during the January-March period of 2023, as they sought to limit early mortgage repayments to protect their income.

According to the National Administration of Financial Regulation (NAFR), a total of 104,909 consumer complaints were registered during this period, marking a 50 per cent increase from the previous quarter.

The rise in complaints was largely driven by issues related to home loans. Specifically, complaints concerning consumer lending experienced a significant surge, growing by 2.1 times to reach 59,827 cases.