In the first half of 2024, there has been a growing trend of Chinese residents paying off their mortgages ahead of schedule, mainly due to pessimistic expectations about the future economic prospects. Analysts point out that borrowers are choosing to repay early to alleviate future financial burdens, which will significantly impact and influence the banking system.
According to data from the first half-year reports of 19 listed A-share banks in China, 14 banks saw a decrease in outstanding personal housing loans compared to the end of 2023, while only 5 banks showed growth.
As the major players in the mortgage market, state-owned banks in China have been significantly affected by the trend of early repayment. In the first half of 2024, the total outstanding personal housing loans of the six major state-owned banks (including ICBC, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank) decreased by 325.471 billion yuan. In 2023, the total outstanding personal housing loans of the six major state-owned banks decreased by 556.857 billion yuan.
Among the state-owned banks, Postal Savings Bank was the only bank to achieve an increase in outstanding personal housing loans in the first half of this year, while ICBC, China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications all saw decreases compared to the end of the previous year. Particularly, ICBC and Agricultural Bank of China showed significant decreases in outstanding personal housing loans, each exceeding 100 billion yuan, with China Construction Bank and Bank of China following closely behind.
In terms of joint-stock banks, among 10 banks, the outstanding personal housing loans of CITIC Bank, Ping An Bank, Zhejiang Commercial Bank, and Huaxia Bank increased, while those of China Merchants Bank, Industrial Bank, Everbright Bank, Shanghai Pudong Development Bank, Minsheng Bank, and Bohai Bank decreased compared to the end of 2023. Notably, China Merchants Bank and Industrial Bank saw reductions of 10.047 billion yuan and 10.741 billion yuan, respectively.
In terms of asset quality, due to factors such as sluggish real estate sales and slowing economic growth, the non-performing loan ratios of large and medium-sized banks have almost all increased compared to the end of the previous year. Among the 14 large and medium-sized listed banks that disclosed relevant data, in the first half of this year, 13 experienced an increase in non-performing loan ratios for personal housing loans, with only 1 showing a decrease.
Lu Yuanxing, a former senior executive in several Chinese companies’ marketing departments, stated that the intensified trend of Chinese residents repaying their mortgages early is primarily driven by people’s extremely pessimistic views on the future economic outlook. Therefore, they are seeking various ways to save expenses.
On September 4th, in an interview with the Epoch Times, Lu Yuanxing expressed that the longer the repayment period for a mortgage, the higher the total expenditure and the proportion of interest paid. Repaying the mortgage early means reducing interest expenses, with the motivation behind it being to save funds. This phenomenon reflects the public’s pessimistic expectations of the Chinese economy and uncertainties about future income, fearing a decline in future repayment capabilities. Therefore, early repayment has become the choice for many to alleviate future financial burdens, which undoubtedly will have a significant impact on banks.
Lu Yuanxing said that banks’ main source of profits comes from the interest spread between loans and deposits, where the loan interest rate is higher than the deposit rate, allowing banks to earn the difference. However, with a large number of mortgages being repaid early, banks cannot obtain the expected interest spread. Meanwhile, private deposits have been increasing in recent years, indicating a general tendency for people to save money rather than consume. With the expansion of deposit sizes, banks are also experiencing a rise in interest expenses.
“In this situation, banks face the risk of declining profits, and income may not cover expenses, potentially leading to losses,” he said.
Li Hengqing, a scholar at the Washington Information and Strategic Research Institute, also told the Epoch Times that in the past, when people had extra money on hand, they would typically invest to earn returns and offset loan interests. However, with the overall downturn of the Chinese economy, investment opportunities have become very limited, if not nearly nonexistent.
Li Hengqing stated, “In this situation, if people still have cash on hand, they are more likely to repay their loans early because loans have a cost and require paying interest. Therefore, everyone hopes to repay their loans as soon as possible, reduce debt, and lower their financial costs.”
Currently, as the mortgage rates for first and second homes continue to decrease, some cities’ mortgage rates have entered the “2-digit era” (falling below 3.0%), while most existing home mortgage rates remain above 4%. The gap between existing home mortgage rates and new home mortgage rates continues to widen, prompting more people to choose to repay their loans early.
Recently, several existing home loan users labeled as “Guangzhou” expressed on social media platforms that their requests for early repayment through the Industrial and Commercial Bank of China (ICBC) app were rejected because the requested amount did not meet the minimum requirement. According to screenshots shared by some users, the ICBC app system prompted: “If you choose a partial settlement for the repayment method, the entered amount must be greater than 50,000 yuan.”
A staff member at a mortgage center of ICBC in Guangzhou confirmed this information to “Caixin.” The employee revealed that the adjustment was implemented around the end of August. According to the new system settings, users must apply online for early repayment amounts of 50,000 yuan or more. If the early repayment amount is less than 50,000 yuan, the borrower would need to visit offline locations to complete the relevant procedures.
Lu Yuanxing commented that raising the threshold for early repayment is a double-edged sword in practice. It might produce two effects: borrowers with tight cash flow may be forced to give up early repayment, while borrowers with sufficient funds would not be affected. However, those who planned to repay two or three thousand yuan early might borrow additional money to reach 50,000 yuan, actually increasing the early repayment volume. “This could lead to a larger scale of early repayments, having a more significant impact on banks, possibly offsetting the effects of the quota restrictions on some individuals unable to repay. Therefore, raising the threshold may not be wise and may have limited effectiveness.”
Li Hengqing also pointed out that many Chinese banks are facing tremendous pressure. Loans related to housing are secured loans; however, the decline in house prices is devaluing the collateral. Nevertheless, for Chinese banks, collateralized loans are relatively safe because even if borrowers cannot repay the principal and interest, banks can still sell the property used as collateral to at least recover some of the loan.
“In reality, the liquidity of Chinese banks has plummeted to a very low level. Loans secured by real estate can keep the bad debt rate relatively low, so banks particularly do not want borrowers to repay early and often set penalty amounts to deter repayment. But the more the Chinese people are prevented from doing so, the more they will insist on early repayment. They believe that the banks’ hindering actions must be motivated by disadvantaging borrowers, so they will strive to repay the loans as soon as possible.”
Amidst a backdrop of continuous reduction in deposit rates by Chinese banks, household deposit growth has slowed down, yet this change has not translated into increased consumption.
Data from the People’s Bank of China shows that renminbi deposits increased by 10.66 trillion yuan in the first seven months of 2024. Among them, household deposits increased by 8.94 trillion yuan.
On July 12, the People’s Bank of China released financial data stating that in the first half of this year, household deposits increased by 9.27 trillion yuan, with an addition of 2.14 trillion yuan in June.
Over the past eight years, while the deposit size has continued to expand, the proportion of resident deposits has steadily increased, rising from 39.7% in 2016 to 48.2% in 2023, with an increase of approximately 9 percentage points.
With a sluggish Chinese economy and a high youth unemployment rate, the latest official data from the Chinese government shows that industrial activities in China further declined in August, marking the fourth consecutive month of contraction. Against the backdrop of widespread layoffs in white-collar industries, including the financial sector, this year’s record-breaking 11.79 million university graduates are facing unprecedented employment challenges.
In June this year, China’s retail sales only grew by 2% year-on-year, falling below expectations and marking the lowest level in 18 months. Analysts believe that these data indicate that the measures implemented by the Chinese government to boost consumption have not effectively encouraged people to spend heavily in stores yet. Due to factors such as falling real estate prices, unstable employment, and high debt levels, Chinese households have become more cautious about their expenses.
China’s economic growth rate in the second quarter dropped from 5.3% in the first quarter to 4.7%, lower than expected and marking the lowest growth rate since the first quarter of 2023. This indicates that the series of measures taken by the Chinese authorities have had minimal effect in revitalizing consumer confidence.