China’s banking regulator is reviewing banks’ property loans to gauge risks in the financial sector as the debt crisis in the real estate sector gets worse, according to sources familiar with the matter.
The China Banking and Insurance Regulatory Commission (CBIRC) is looking at how exposed banks – both local and foreign – are to developers, and to see if credit decisions were made according to the rules, according to one source.
They also want to assess systemic risks, two sources with knowledge of the matter said.
The aim of the latest probe is to measure risks to the financial system from the ongoing property sector turmoil, according to two sources. It was not immediately clear what action the regulator might take after the investigation.
The CBIRC did not respond to requests for comment. And all the sources declined to be named due to the sensitivity of the matter.
The move comes as policymakers have been trying to stabilise the property sector, which 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 underscores the challenges for Beijing in its efforts to encourage banks to extend fresh loans to embattled real estate developers, while managing lending risks.
Property loans accounted for 25.7% of total banking sector credit in China as of end-June, Chinese central bank data showed. The banking sector’s total outstanding loans was 206 trillion yuan ($30.3 trillion) at the end of the first half.
While Chinese banks have the biggest exposure to local developers and homebuyers, foreign lenders including HSBC Holdings and Standard Chartered lend to property firms.
HSBC and StanChart spokespeople did not 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, aggravating a crisis that has already hit the economy and could lead to social instability.
The CBIRC is also asking some developers for details of their cash positions and the source of money for debt repayments, a third banking source said. The probe is different to the routine self-reporting the regulator requires from banks.
Beijing’s launch of tough leverage rules for developers in recent years has led to cashflow issues for many, leaving some scrambling from one month to the next to pay upcoming debt and sometimes failing.
“The regulator wants to know how to tailor policy and assess risk,” said one banker at a foreign lender, who has been asked for property sector-related lending documents over the last couple of weeks.
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.
“The risk of new NPLs (non-performing loans) will remain a threat to banks’ asset quality,” rating agency Moody’s said in a note in June.
Commercial banks’ non-performing loan ratio stood at 1.67% at the end of June, down from 1.73% at the beginning of this year, according to CBIRC data.
New bank lending in China tumbled more than expected in July while broad credit growth slowed, as fresh Covid flare-ups, worries about jobs and the property crisis made companies and consumers wary of taking on more debt.
The property sector credit trouble is at risk of seeping into secondary industries such as asset management companies, privately-owned construction firms and small steelmakers, said Fitch Ratings in a note earlier this month.
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