BEIJING (BLOOMBERG) – China’s banks face mortgage losses of 2.4 trillion yuan (S$491.5 billion) in a worst-case scenario as confidence plunges in the nation’s property market and the authorities struggle to contain deepening turmoil.

A spiralling crisis of stalled projects has dented the confidence of hundreds of thousands of home buyers, triggering a mortgage boycott across more than 90 cities and warnings of broader systemic risks. The big question now is not if, but how much it will batter the nation’s US$56 trillion (S$77.3 trillion) banking system.

In a worst-case scenario, S&P Global Ratings estimated that 2.4 trillion yuan, or 6.4 per cent of mortgages, is at risk, while Deutsche Bank is warning that at least 7 per cent of home loans are in danger. So far, listed banks have reported just 2.1 billion yuan in delinquent mortgages as directly affected by the boycotts.

“Banks are caught in the middle,” said finance professor Chen Zhiwu from the University of Hong Kong Business School. “If they don’t help the developers finish the projects, they would end up losing much more. If they do, that, of course, would make the government happy, but they add more to their exposure to delayed real estate projects.”

Already rattled by headwinds from slowing economic growth, Covid-19 disruptions and record high youth unemployment, Beijing is placing financial and social stability at the top of its priorities. Efforts that have been contemplated so far included a grace period on mortgage payments and a central bank-backed fund to lend financial support to developers. Either way, banks are expected to play an active role in a concerted state bailout.

The exposure of Chinese banks to the property sector tops that of any other industry. There was 39 trillion yuan of outstanding mortgages and another 13 trillion yuan of loans to developers at the end of March, according to data from the People’s Bank of China.

The real estate market is “the ultimate foundation” for financial stability in China, Teneo Holdings managing director Gabriel Wildau said in a note in July.

As the authorities move to keep risks in check, lenders with high exposure could come under greater scrutiny. Mortgages accounted for about 34 per cent of total loans at Postal Savings Bank of China and China Construction Bank at the end of 2021, above a regulatory cap of 32.5 per cent for the biggest banks.

About 7 per cent of outstanding mortgage loans could be impacted if the defaults spread, according to Deutsche Bank analyst Lucia Kwong. This estimate may still be conservative given the limited access to information on the unfinished projects, she said.

Local banks – city and rural commercial lenders – could shoulder more responsibility than state peers, based on earlier bailouts and also due to their stronger ties with local governments, though their capital buffers lag far behind the industry average.

Chinese banks have raised a record amount of capital in the first half from bond sales as they prepare for a potential spike in soured loans.

Bad loans at lenders, which amounted to 2.9 trillion yuan at the end of March, are poised to reach new records and further strain an economy that is expanding at the slowest pace since the onset of the Covid-19 outbreak.

While China’s total debt-to-gross domestic product is forecast to climb to a fresh record this year, consumers have been reluctant to take on more leverage. This has ignited a debate over the risk of China falling into a “balance sheet recession”, with households and companies cutting back on spending and investing.