China’s banking regulator probing property sector loans
Sources with knowledge of the matter said that China's banking regulators are looking at property sector loan portfolios of some local and foreign lenders to assess systemic risks, as the real estate sector's debt crisis worsens.
As part of their assessment, the China Banking and Insurance Regulatory Commission CBIRC is looking at banks' loan book exposure to developers to find out if the credit decisions were made according to the rules, one of the sources said.
The aim of the regulatory probe is to measure risks to the financial system from the ongoing turmoil in the world's second-largest economy, two of the sources said.
The sources who were not named were unable to be named due to the sensitivity of the matter.
The move comes as policymakers try to stabilise the property sector that accounts for a quarter of the economy after a string of defaults among developers on their bond repayments and a slump in home sales.
The investigation highlights the challenges for Beijing in its efforts to encourage banks to extend fresh loans to embattled real estate developers while managing lending risks.
As of end-June, Chinese central bank data showed that property loans accounted for 25.7 per cent of total banking sector credit in China. The banking sector's total outstanding loans was $30.3 trillion at the end of the first half.
The debt crisis in China's property sector has worsened in recent weeks after a large number of homebuyers threatened to stop making their mortgage payments for stalled property projects, causing a crisis that could lead to social instability.
A third banking source said that the CBIRC is asking some developers for details of their cash positions and the source of money for debt repayments. The regulator requires banks to report their own information, so the probe is different from the routine self-reporting required by the banks.
In recent years, Beijing has launched tough leverage rules for developers, which has resulted in cashflow issues for many, leaving some scrambling from one month to the next to pay upcoming debt and sometimes failing.
One banker at a foreign lender who asked for property sector-related lending documents over the last couple of weeks said the regulator wants to know how to tailor policy and assess risk.
The investigation is very detailed and loan officers are being approached multiple times, sometimes over many weeks, for additional documents on lending to specific developers, two of the sources said.
The rise in mortgage defaults raises risks for banks and developers.
In a June note from Moody's, the risk of new NPLs non-performing loans will be a threat to banks' asset quality.
In August, Fitch Ratings said that the credit trouble in the property sector is at risk of entering secondary industries such as asset management companies, privately owned construction firms and small steelmakers.