China probing property loans to assess systemic risks

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China probing property loans to assess systemic risks

Sources with knowledge of the matter said China's banking regulators are looking at the property sector loan portfolios of some local and foreign lenders to assess systemic risks, as the real estate sector's debt crisis worsens.

One of the sources said that the China Banking and Insurance Regulatory Commission CBIRC is looking at banks' loan book exposure to developers as part of their assessment to find out if their credit decisions were made according to the rules.

Two of the sources said the aim of the regulatory probe is to measure the risks to the financial system from the ongoing turmoil in the world's second-largest economy. It was not immediately clear what action the regulator might take after the investigation.

All sources didn't want to be named due to the sensitivity of the matter.

The move comes after a string of defaults among developers on their bond repayments and a slump in home sales have caused policymakers to try to stabilise the sector that accounts for a quarter of the economy.

The investigation underscores 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 outstanding loans were 206 trillion yuan $30.3 trillion at the end of the first half.

Foreign lenders including HSBC Holdings and Standard Chartered lend to property firms while Chinese banks have the biggest exposure to local developers and homebuyers.

HSBC and StanChart spokespeople didn't respond to requests for comment.

The debt crisis in China's property sector worsened in recent weeks after a large number of homebuyers threatened to stop making their mortgage payments for stalled property projects, which has already hit the economy and could lead to social instability.

A third banking source said that the CBIRC is asking developers for details of their cash positions and the source of money for debt repayments. The probe is different from the routine self-reporting the regulator requires from banks.

The launch of tough leverage rules for developers in recent years has resulted in cashflow issues for many, leaving some scrambling from one month to the next to pay debt and sometimes failing.

A banker at a foreign lender, who has been 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.

Moody's said in a June note that the risk of new NPLs non-performing loans will be a danger to banks' asset quality.

Commercial banks' non-performing loan ratio was 1.67 per cent at the end of June, down from 1.73 per cent at the beginning of the year, according to CBIRC data.

New bank lending in China fell more than expected in July, as new COVID 19 flare-ups, worries about jobs, and the property crisis made companies and consumers more hesitant to take on more debt.

Fitch Ratings said that the property sector credit trouble is at risk of going into secondary industries such as asset management companies, privately owned construction firms and small steelmakers.