In Depth: China’s Banks Feel the Strain as Foreclosures Pile Up

In China, the number of foreclosed properties has surged significantly, creating concerns about broader financial implications amid an ongoing economic downturn. Within the first ten months of the current year, foreclosed property auctions increased by over 63% compared to the previous year, totaling 546,000 units, according to Beijing Guoxinda Data Technology Co., Ltd. However, these properties are increasingly difficult to sell [para. 1][para. 2]. Foreclosed properties, including residential, commercial, and industrial units, typically originate from overdue loans, private lending disputes, and judicial confiscation, and the initial auction price is usually set at 70% of market value [para. 3].

Despite this, only 23.5% of foreclosed properties found buyers during the first ten months of this year, down from 28% in the previous year and 25% in 2022. This trend persists despite discounts of about 23% on the auction starting price. The lack of public data makes it hard to estimate the total number of foreclosures, but experts suggest there are millions of residential properties in this state [para. 4][para. 5].

The rise in foreclosures is driven by individuals and businesses facing financial hardship, with such properties often sold below market value, once attracting investors. However, with a downturn in China's property market and declining property prices, investment value is eroding, prompting many investors to withdraw [para. 6]. Chinese corporate borrowers usually use real estate as collateral, creating challenges when values fall and foreclosure sales falter, leading to difficulties in banks recovering nonperforming loans. Research from China Real Estate Information Corp (CRIC) indicates that tens of thousands of homes enter the foreclosure market monthly, often taking over two years for debts to move from default to auction, suggesting the backlog of foreclosures might just be starting [para. 7][para. 8].

A possible peak in foreclosed property listings is anticipated in 2025 and early 2026, stemming from worsening debt defaults from mid-2022 to late 2023 [para. 9]. Historically, before the pandemic and economic slowdown starting in 2020, the foreclosure market was thriving, providing profitable opportunities during China's real estate surges. However, by mid-2024, the balance of property-backed loans reached 23.8 trillion yuan ($3.26 trillion) as businesses sought loans to bridge financial gaps [para. 11][para. 12].

Foreclosed assets included notable portions of office buildings and commercial properties during the pandemic-induced economic distress. However, demand has sharply declined, with some properties struggling to sell even at half their market value. As the trend continues, newly listed residential foreclosures constituted over half of all foreclosures in recent years [para. 15][para. 16]. Companies frequently use cash for property investments and mortgages for bank loans in China, which, amid falling property prices, results in limited refinancing options and increased defaults [para. 18].

Fear of nonperforming loans rising has kept banks reluctant to offload foreclosed properties rapidly. By the end of September, the nonperforming loan balance of China's commercial banks reached 3.38 trillion yuan, up 4.72% year-on-year. Recovery depends on a rebound in property prices, indicating potential future decreases in foreclosure listings [para. 27][para. 29]. Emerging positive trends in the real estate market, highlighted in recent government policies, promise some stability [para. 31].

Despite minor improvements, the foreclosure market still struggles, with October seeing an 18% decline in transactions compared to the previous month, as reported by CRIC [para. 34].