Uncertainty on Chinese banks’ asset quality has increased amid a real estate downturn. The most consequential risk is the ballooning number of home buyers refusing mortgage service given delivery concerns. We estimate that CNY1.1trn to 1.8trn of mortgages are at risk. This could lower banks’ Tier 1 capital ratio by 40-80bps in the worst-case scenario. Additionally, falling land sales related revenues may lead to spending curbs by local governments. Our analysis shows that large banks will have ample capital to withstand such headwinds, and central government support could provide additional cushion.
