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China’s real estate market is crumbling, and it’s threatening to take the country’s banking sector with it. Is China about to suffer its own 2008-style financial crisis? Cao Li reports for The Wall Street Journal:

Shares in China’s privately run banks have fallen sharply this year, as the country’s property slowdown starts to bite.

The Shanghai-listed shares of China Merchants Bank and Ping An Bank Co.—two of China’s biggest, most prominent privately run lenders—have fallen by 32% and 25%, respectively, since the start of 2022, wiping $68 billion off their combined stock market value.

The selloff is just the latest indication of the problems a slowdown in the property sector is having on the wider economy. A two-year deleveraging campaign has damaged Chinese property companies, bringing on a liquidity crunch that has led to defaults among developers, the suspension of ongoing building projects and a big drop in new home sales. It has also fueled a boycott among some home buyers who are refusing to repay their mortgages.

That is bad news for Chinese banks, but the impact for China Merchants Bank and Ping An Bank will be worse than for the biggest state-owned lenders, said Kenny Ng, a securities strategist at Everbright Securities International. Declines in real-estate asset values will slow their mortgage business and hurt the wealth management products that the two banks have sold to their clients, some of which have included exposure to property developers’ debt, he said.

The shares of China Merchants Bank and Ping An Bank have easily outperformed the country’s big state-owned banks over the last five years, in part because the duo was flexible enough to tap new sources of wealth in a fast-growing economy, including making big bets on digital banking to boost their retail businesses. But analysts warn the privately run commercial banks will have more difficulty finding new sources of business in China’s slowing economy.

“The biggest problem the Chinese economy is facing is not liquidity,” Mr. Ng said. “Banks have enough liquidity, but consumers or investors don’t want to borrow from banks to spend or invest. This shows a lack of confidence.”

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