Banking Regulator Focuses on China Real Estate Market Risks

China’s chief banking regulator vowed last week to limit the amount of leverage in the country’s real estate sector this year and to be on the lookout for illegal lending practices as the country’s property developers continue to come under pressure from slowing sales and falling prices.

Speaking at a banking and finance regulatory meeting held last week to review the nation’s economy and banking developments during the first half of 2014, China Banking Regulatory Commission (CBRC) Chairman Shang Fulin made it clear that the commission still expects significant financial risks associated with the nation’s real estate markets this year.

According to a report in the official Beijing News, Shang indicated that the commission would continue to strictly control lending for real estate development, but would now be taking steps to ensure that families can secure mortgage financing to help secure housing.

Keeping An Eye on Commercial Loans

For commercial lending Shang said that the banking regulator would largely continue with its existing approach to managing risk by seeking to limit the amount of leverage taken on by developers, stamp out illegal fund-raising and limit other types of risks within China’s shadow banking sector that might lead to more non-performing loans or other credit failures.

Just last Wednesday CBRC Vice Chairman Yan Qingmin published a commentary in the international media in which he acknowledge that real estate companies had become the primary source of rising non-performing bank loans in China.

According to the most recent report issued by the CBRC, the percentage of non-performing loans at China’s commercial banks stood at 1.08 percent at the end of June, up just 0.08 percentage points this year to RMB 102.4 billion.

Despite the seemingly stable situation on bank balance sheets, there have been number of high profile collapses of real estate companies after they were unable to meet their credit obligations. In the case of companies in Ningbo and Hangzhou that collapsed, and with regard to a Shanghai project which was frozen by the courts, the developers all had borrowed from a combination of traditional banks and official channels in financing their projects.

According to figures released last week by China’s central bank, new loans for real estate development were up 9.7 percentage in the second quarter of this year compared to the first quarter. The total new loans for development projects during the period amounted to RMB 1.16 trillion.

Mortgage Credit to Expand

The chairman’s remarks concerning mortgages appear to confirm the government’s decision to provide some limited stimulus to the real estate sector, by supporting home loans for individuals.

Just last week Agricultural Bank of China, one of the nation’s four largest banks, announced that it would be re-introducing discounts on mortgages for first-time homebuyers – an incentive which the central government had pressured banks to eliminate as housing prices skyrocketed last year.

The move to stimulate mortgage demand comes as growth in home loans slowed down by 2.1 percentage points during the most recent quarter. According to those latest figures from the central bank, the balance of home loans in China grew by 19.3 percent from the first quarter to the second quarter of this year, reaching RMB 21.74 trillion by the end of June.