Banks Gone Wild: Dumping Thousands of Houses to Save Their Skins in China | Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depth to review unique perspectives. Today, we are going to talk about something unusual that's been happening in China's real estate market lately. It's called bank direct supply housing. In simple terms, when banks end up with bad loans and borrowers can't pay them back, they skip the traditional judicial auction process. Instead, they transferred the mortgage properties directly into their own names and list them for sale at the low prices to clear out those bad assets faster. This isn't the first time it's happened. Over the past two or three years, major banks have been doing this quietly. But this year, the number of properties banks are acquiring has surged and some have even released over a thousand units at once. That has created a big impact on the real estate market. So, why are banks stepping in to sell houses themselves? Why the rush to clear inventory? It's not just about the pressure from bad loans and the banking system. It also crosses regulatory boundaries and could disrupt the government strategy to stabilize real estate prices. In this video, we'll break down the bank direct supply housing trend and look at what economic realities it reveals along with the risk signals we should watch for. First, let's look at the scale of this bank direct supply phenomenon this year. According to a report from EAI Global on major asset trading platforms like Ali assets and JD assets banks such as Agricultural Bank of China, China construction bank, Bank of Communications, Landro Bank, Giling Rural Commercial Bank and the Landro Rural Commercial Bank are all offering direct sales. The listings from local city commercial banks and the rural credit unions stand out the most. For example, Landro Banks data on the JD assets platform shows 1,130 properties listed for direct sale in 2024, rising to 1,79 in 2025. Jilling Bank has more than 2,000 listings and Tenzin Bank has nearly 1,300. Since the first half of 2024, the Sutuan Rural Credit System has listed over 25,000 properties for sale and the Leoning Rural Credit System has accumulated 11,000 direct sale listings. Beyond the selling houses directly, banks are even auctioning rental rights on properties to make use of bad assets. For instance, China Bank Forchan branch auctioned the rental rights on a residential unit on November 10th with a starting bid of 900 yen per month for a one-year lease. This shows how actively banks are working to handle their bad assets, sell if possible, rent if not. And we see that smaller banks like a rural credit unions and the city commercial banks are releasing the most direct supply houses. That points to the greatest pressure on their operations. So why are banks using this direct supply method to handle bad assets? The reasons are straightforward, but economic pressures involved may be more serious than many people think. First, the traditional ways banks have handled the bad assets no longer work well. For the past 10 years or so, regulations required collateral to go through judicial auctions for bad loans, unless it failed to sell after three attempts, then the bank could accept the property as a debt repayment. But the judicial auction market is very slow right now. Industry data indicates that in June 2025, supply reached a yearly high of 32,000 units, but only 3,200 sold for a transaction rate of just 10%. In this environment, if banks keep using auctions, nine out of 10 properties would likely fail three times, take at least two years, and still end up unsold on the bank's book. For the bank, it's better to avoid auction, transfer the property to its own name, and sell it directly. That way, they recover some cash without the long delay and a high cost in time and resources. If it still doesn't sell, the bank can rent it out as a landlord and earn some income. It's better than leaving it empty. Banks have reached this point because reality has forced their hand. Second, in China, smaller banks have less ability to withstand the risks, especially rural credit unions and the city commercial banks with their limited capital. After the real estate sector faltered, their bad debts increased sharply. These banks can't hide the bad loans or delay like larger banks do while waiting for economic recovery. They must clear bad debts quickly or they risk collapse. This explains why most direct supply houses come from rural credit unions and local city commercial banks. Third, banks understand that China's housing prices have not reached the bottom yet to handle bad assets now. They need to act quickly rather than slowly. Waiting another year could lead to even greater losses. During real estate upswings, properties were valuable collateral for banks. They even quietly hope for defaults to acquire houses that would appreciate. But in this downturn, those same assets have become high risk inventory. Banks must clear them to protect cash flow. This is why bank direct supply housing is emerging now. It's a signal that the banks are trying to save themselves. In the past, regulators require all bad assets to go through judicial auctions to prevent the banks from speculating in property. But banks are now ignoring that rule and the regulators are making compromises in the face of reality. With the prices falling, banks are not speculating. They are simply trying to survive. However, the rise of bank direct supply housing has disrupted the Chinese government's approach to regulating real estate. The current situation is very awkward. If banks do not selfrescue, financial risks will erupt. If they do self-rescue, it creates financial risks in another way. It's a no-win scenario with dangers on both sides. And that's the government's biggest headache. Both parts seem blocked. Let me explain the logic here. First, if banks do not use direct supply to self- rescue, bad debts will keep building on their books while collateral values continue to drop. That drives up non-performing loan ratios, increases provision requirements, and erodess capital adequacy. Smaller banks will fail first, leading to regional financial risks. In plain terms, as prices fall, further collateral shrinks, bank assets deteriorate and the banks start failing. So doing nothing is not an option. But the problems is that the bank's choices to sell large volumes of direct supply houses for self-rescue also has huge downsides. They release thousands of debt repayment properties onto the market at once without concern for reasonable prices. A house worth 2 million on the market might sell for 1 and a half million. For the bank that's damage control for the market, it breaks the price structure. Once banks sell aggressively, price expectations collapse because people realize a harsh truth. Even banks do not believe real estate will recover soon. If that's the case, prices cannot have bottomed yet. Only someone foolish would buy in then. This directly undermines the government's overall strategy for regulating real estate. In the past two years, all of China's policies to support the market have focused on three main goals. stabilizing expectations, stabilizing prices, and steadying market sentiment. Measures like easing purchase restrictions, lowering interest rates, reducing down payments, issuing housing vouchers, and renovating Shandandy towns are essentially ways to prevent a sharp drop in prices. The reason is that if prices lose control and expectations shatter, real estate could pull down the entire financial system. But banks are no longer able to align with the government stabilization efforts. They are struggling to stay afloat themselves. Every extra day, holding bad assets brings them closer to failure. So they sell properties in batches at low prices taking whatever they can get. The result is that their self-rescue efforts speed up the price decline and once prices fall sharply real estate drags the financial system down with it leading to share collapse. The situation is truly awkward. If banks do not self-rescue they fail. If they do real estate takes them down too. Both options lead to trouble. Now the question is when the four major state banks had a massive bad debt in the past. The country created four AMC asset management companies to remove those bad loans. Why not do the same now instead of allowing banks to sell properties on the market for self- rescue? Are they not concerned that these direct supply houses will drive prices down? The answer is quite harsh. The Chinese government today cannot rescue that many banks. Back then, it was possible to strip bad debts from the four major state banks because the economy was growing. The bad debts from the 1990s were mostly existing ones and the rapid GDP growth diluted them over time. The central government could package the bad assets and hand them to the AMC's allowing economic expansion to gradually absorb the losses. But today is different. The economy is declining. Real estate is weakening long-term and the collateral values keep shrinking. Bad debts are not just existing ones. New ones emerge every day. removing 100 billion today and 100 billion more appears tomorrow. It's an endless pit. And these current bad loans have little recovery value. If an AMC takes them on, it's like buying a pile of worthless items. On top of that, past the bad debts were concentrated in state banks while today's are spread across thousands of small banks. The banking system has grown so large over the years. If the government uses the AMC model now to backs stop all these banks, it would be moving thousands of risks directly under the finance ministry. The fiscal side could not handle it and would not dare to try. So right now the government is being practical. focus resources on saving large banks and estate owned ones which affect the whole system if they falter but thousands of small banks must fend for themselves. This makes it clear why regulators are overlooking bank direct supply sales. Their position is straightforward. These small banks must use market forces to clear bad debts. Those that survive do so on their own strength. The government cannot help much. Of course, when choosing between protecting real estate or protecting banks, the government will choose banks. The risk priorities are if banks fail first, it could trigger a financial crisis, worsen local government problems, and collapse the credit system. But if real estate fails first, banks are further along in the chain, providing some buffer and possibly more time. Between the two, the government picks the better of bad options. Select risks released gradually from the property side rather than exploding immediately in the banking sector. In other words, prices can fall a bit more, but the banks cannot fail first. So even if direct supply houses pressure and shatter market expectations, regulators must allow it because the risks in banks hands are larger and more dangerous. Finally, let's sum up with two key points. First point, bank direct supply housing is unlikely to be a short-term issue. It will probably become a standard tool for banks to clear bad assets in the coming years. Second point, China's housing market cannot recover after just one or two more years. It must go through the full painful process of reducing leverage. This is the receding tide of an era and it has only just begun. Thank you so much for watching. 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