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'Mortgage crisis to limit Chinese loans to SL'

19 Jul 2022

  • Murtaza Jafferjee highlights tighter financial conditions in China
  • Notes China concerned about setting a precedent by restructuring debt to SL
  • Adds they are ‘rational actors’, SL should ‘act professionally’
By Imesh Ranasinghe China’s ongoing mortgage crisis will not have any impact on debt restructuring negotiations with Sri Lanka, but will limit the outflow of new funds with tighter financial conditions in China, said Advocata Institute Chair Murtaza Jafferjee. Speaking to The Morning Business, Jafferjee said that tighter financial conditions in China will reduce the flow of new Chinese funds, but since Sri Lanka’s debt is money that has already been lent, it will have no impact on debt negotiations.  In terms of debt restructuring with Sri Lanka, he noted what matters to the Chinese is setting a precedent in Sri Lanka, which will have bearing on the hundreds of billions of dollars China has lent to other countries. “Chinese are rational actors and they play the long game. It’s up to us to act professionally by first appointing a stable Government,” he added. In May, it was announced that China is considering offering upto $ 2.5 billion to Sri Lanka with a $ 1.5 billion credit line facility, but with the crisis in China, this is now in question. Also, the Central Bank of Sri Lanka is in talks with the Chinese Authority to convert the $ 1.5 billion swap facility to usable form by stripping its existing conditions, which have not allowed the Central Bank to use it so far. China accounts for about 10% of Sri Lanka's total external debt. Moreover, Jafferjee said that Sri Lanka will benefit from lower construction imports, as buyers of homes at 100 unfinished projects from 47 cities in China have stopped making payments since the end of June on their mortgages. He said that China accounts for 40% of hard commodity purchases, of which 50% is for residential construction. “Softness in demand is a headwind for commodities, but the infrastructure push may act as a tailwind,” he said adding that as Sri Lanka is a net importer of commodities, lower prices will improve Sri Lanka’s terms of trade. According to Autonomous Research, Chinese banks have about $ 9.2 trillion of exposure to the property sector. More than half is in the form of mortgage loans. At China Construction Bank Corp., one of the world’s largest banks, mortgages account for more than 20% of its total assets. Property developers such as Evergrande and Country Garden Holdings Co. contributed to the residential housing boom in China through a so-called pre-sales model, where apartments are purchased long before they are completed. Now the builders don’t have money to finish these projects. In the past year, 28 of the top 100 Chinese developers have defaulted or asked their debtholders for extensions, data by CLSA Ltd. a capital markets and investment group showed, and they account for about 20% of China’s total property sales. In the first half of 2022, property sales in China plummeted 72% from a year ago, further eroding their cash flow. According to Jafferjee, residential construction in China accounts for 15% of GDP, and with problems in the mortgage market, credit flows into the sector will slow contracting demand. He noted that the Chinese Government has announced a massive stimulus in terms of infrastructure spending to offset the contraction in the residential construction sector. According to Reuters, the China Banking and Insurance Regulatory Commission (CBIRC) has instructed the banks to meet developers' financing needs reasonably. However, Chamber of Construction Industry President Ranjith Gunathileka said that since the construction industry in Sri Lanka has come to a standstill with the high prices of construction materials and the inability to import required material, it is unlikely that Sri Lanka will benefit from any reduction of prices in construction materials in China.  


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