A significant portion of personal business loans are being used by Chinese borrowers to cover residential mortgage payments, posing a growing risk to the already embattled property sector as loans come to their end of term, according to a report by CreditSights.
While mortgage loans have tenors of up to 30 years, PBLs are renewed every three years, when the value of assets used as collateral are reassessed. With property values declining by as much as 50 per cent in some Chinese cities, some loans risk being marked as insufficiently collateralised when borrowers’ property is used for this purpose.
Borrowers who cannot provide additional collateral risk the loans being downgraded to non-performing loan status, triggering remedial actions that could push the real estate market into a vicious circle.
Karen Wu, Asia-Pacific financials director at CreditSights, said: “This could force some borrowers to sell homes at steep discounts, further weighing on China’s property sector.”
Historically, there has been more favourable interest rates attached to PBLs compared with mortgages, often by as much as 150 basis points, according to CreditSights.
As of April 2025, the average mortgage rates were 3.1 per cent for first homes and 3.2 per cent for second homes. PBLs were mostly maintained at rates of around 3 per cent, although some banks had reduced rates to as low as 2 per cent.
The report notes that 2021 and 2022 were likely the peak for PBLs being taken out to serve mortgages — more than 70 per cent of them were used for this purpose — but due to the three-year assessment cycle, the risks are most acute this year.
Figures from China’s State Council’s 2021 audit report found that 364 out of 517 sampled micro loans had no underlying business activity. “It is reasonable to estimate that at least half of the current outstanding PBLs are, in fact, disguised mortgage loans,” the report noted.
There has been a rise in non-performing loans from PBLs, rising 60bp in 2024. “We expect the trend to at least continue if not worsen in 2025,” the report noted. There are concerns the levels of NPLs are under-reported and do not fully reflect the asset quality risks due to support being given to smaller businesses, and NPLs being transferred to asset management companies.
While some loans are taken by individuals through their own businesses and then use the funds to finance home purchases, Wu said there are others who are falsifying business ownership in order to be eligible for loans.
“Many intermediaries offer one-stop solutions, including transferring ownership of pre-established companies to borrowers and fabricating business transactions to help them qualify for PBL applications,” Wu said.