Chinese regulator warns small banks against chasing property sector loans

·4-min read

China’s banking regulator has warned the country’s smaller banks against rushing to grow their property sector loans after a cap on lending by big banks to the highly leveraged industry showed some initial success.

The China Banking and Insurance Regulatory Commission (CBIRC) will pay close attention to growth in property sector loans, and it will identify and closely monitor banks with a high proportion of such lending in their portfolios, Liu Zhongrui, a deputy director of CBIRC’s statistical information and risk surveillance department, said on Tuesday.

“Some medium to small regional banks have stepped up to compete for property loans business, as the bigger state-owned banks reduce their lending,” he said. The regulator will adopt “stricter measures” against lenders that fail to heed its warning. “For banks with a relatively high ratio of newly added property loans, we will put them under a separate list, and require them to sensibly control the growth rate of property loans,” Liu added.

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The warning came as Beijing tries to maintain its grip over China’s debt-fuelled property sector. It wants to cool the property sector and guard against systemic risks in the financial system stemming from excessive real estate lending and speculative buying, especially at a time when economic growth in China faces uncertainties arising from the coronavirus pandemic, despite four straight quarters of growth since the second quarter of last year.

The excess flow of funds into the property sector has begun to see a turnaround, said Liang Tao, the regulator’s vice-chairman.

Lending to the property sector recorded its slowest growth in eight years in April, rising 10.5 per cent year on year. Banks’ lending to the sector year-to-date has also been lower than to all other sectors, Liang said.

The number of real estate trust and wealth management products underpinned by property projects has also dropped, with the latter declining by 36 per cent.

“We have seen some improvement in the concentration of property loans following the introduction of the concentration management system,” said Deputy Director Liu. The system, which was introduced on January 1, limits banks’ lending to the property sector according to their capitalisation. The lenders are organised in five tiers, with well capitalised tier 1 banks being able to lend the most. At the other end, small underfunded tier 5 lenders, which might service villages or local communities, are allowed to lend the least.

The concentration of lending to the proper sector has dropped at China’s top six state-owned lenders, which are Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of Communications and Postal Savings Bank of China, Liu said.

Four decades of rapid economic growth have turned communal housing of the Mao Zedong era into some of the world’s tallest residential towers, huge housing estates and opulent villas. China’s property market is the world’s largest, with the sales value of new homes topping US$2.7 trillion last year.

Average prices have grown fivefold over the past 20 years, turning Shanghai, Shenzhen and Beijing into the world’s most expensive cities, according to CBRE’s 2020 survey of global home prices.

But growth in China’s real estate industry has been financed mostly through borrowing, in part because Beijing wants to control oversupply and has banned developers from selling off-plan. The industry has increasingly resorted to bank loans, bonds and any other financial instrument they can be used to fund construction activity and land purchases.

In the first quarter of this year, banks’ loans to the property sector totalled 50.03 trillion yuan (US$7.8 trillion), a year-on-year increase of 10.9 per cent. The banks added loans worth 1.67 trillion yuan during the quarter, data from the Chinese central bank shows.

The total balance of loans owed by property developers that become due this year has risen by 36 per cent to 1.2 trillion yuan from last year, according to the Beijing-based Beike Research Institute.

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