China’s weak property sales and funding constraints fuel developer defaults, sector woes test banks by Moody's

China's property market has faced challenges since the second half of 2021, including developer defaults, downgrades, maturing debts, Covid lockdowns, and mortgage boycotts. The property sector is crucial to China’s economy, accounting for nearly 30% of GDP and impacting regional growth, industrial activity, personal wealth, and spending. The government has issued policy guidance to support the property sector and stabilize the market, but cash woes have led to a record number of Chinese developers being rated negatively, increasing banks' exposure to unpaid loans and delinquencies.

Continued defaults among developers with large debts and weak liquidity are expected, which will further increase banks' asset risks. Banks have become more cautious in lending to developers, especially distressed ones, due to concerns over asset quality risks and slowing economic growth.