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China central bank says to cap property loans by banks

China’s central bank issued a regulation on Thursday to cap property loans by banks, as authorities shift their attention back to debt risks and look to guard against any overlending to the property sector.

The People’s Bank of China (PBOC) said each bank’s outstanding property loans as a proportion of total loans, as well as its ratio of outstanding mortgages to total loans, should be capped as required.

The establishment of the so-called collective management system for real estate loans will enhance lenders’ ability to withstand fluctuations in the real estate market and prevent systemic financial risks caused by over-reliance on real estate loans in the financial system, the PBOC said.

With China’s economy nearly fully recovered to pre-coronavirus levels, policymakers have been turning their attention back to financial risks after record bank lending this year. But analysts believe China’s overall credit growth will ease but only slightly in the near term as caution remains over the global economic outlook.

The government had for years taken measures to restrict credit to the real estate sector to contain financial risks. Nearly 30% of outstanding loans with China’s financial institutions were property loans by the end of September, according to PBOC data.

For China’s big four banks, along with China Development Bank, Bank of Communications and Postal Savings Bank of China, the ratio of outstanding property loans to total loans will be capped at 40% and their outstanding mortgages as a proportion of total loans, will be capped at 32.5%.

For smaller banks, requirements vary. The PBOC said the requirements could be adjusted upward or downward by 2.5 percentage points depending on the region’s economic performance.

Banks that do not meet the requirements would be granted a grace period. If they missed the requirements by less than 2 percentage points, they would be granted a grace period of two years. If more than 2 percentage points, the grace period would be four years.

By end of June, property-related loans accounted for 38.9% and 38.5% of total outstanding loans at China Construction Bank Corp and Bank of China, respectively, according to data compiled by Founder Securities Co Ltd, bringing them close to the 40% upper limit.

The new rule, due to take effect from January 1, will further limit the access of funding for property firms, many of which are heavily indebted.

In August, regulators outlined caps for debt-to-cash, debt-to-assets and debt-to-equity ratios – known as “the three red lines” – at a meeting with 12 major property developers in Beijing.

“‘The three red lines’ will manage capital demand (from property firms), while the property loan management rules will tighten capital supplies,” said Pan Hao, a senior analyst at the Beike Real Estate Research Institute.

Though not officially announced, developers expect “the three red lines” to be applied sector-wide as soon as Friday.

(Reporting by Reuters)

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