Commentary on Political Economy

Thursday, 31 December 2020

 

China Caps Bank Loans to Real Estate to Curb Systematic Risk

Updated on 
  • Banks are given grace period of up to 4 years to implement
  • Move aims to promote property sector’s long-term stability
Under new regulations loans to developers will be capped. 
Under new regulations loans to developers will be capped.  Photographer: Qilai Shen/Bloomberg

China’s regulators will impose caps on banks’ lending to the real estate sector for the first time, in their latest efforts to prevent systematic risks after a series of property curbs in recent years did little to damp buyer enthusiasm.

Under the new mechanism taking effect on Jan 1, 2021, loans to developers will be capped at 40% for the nation’s largest state-owned lenders while banks’ mortgage lending should be no more than 32.5% of their outstanding credit, the People’s Bank of China and the China Banking and Insurance Regulatory Commission said in a joint statement on Thursday. Those exceeding the cap will have a grace period of up to four years to meet the requirements.

The move underscores authorities’ determination to keep a tight rein on the bubble-prone sector and curb leverage at some of the nation’s largest developers. China’s home prices kept rising despite years of regulatory clampdown, stoking social discontent and pushing up financial risks as lenders increased bets on the sector to bolster profits.

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“The new policy is in line with the direction of strengthening supervision and preventing bubbles,” said Chengyu Huang, an investment manager at China Cinda (HK) Holdings Co. “That will further dampen investor sentiment toward the real estate stocks.”

A gauge of Shanghai-listed developer stocks slumped 10% this year, while the benchmark Shanghai Composite Index rallied 14%.

Earlier this year, China’s housing watchdog and central bank have asked 12 developers including China Evergrande Group, Sunac China Holdings Ltd. and China Vanke Co. to report their financing, total debts and business data on the 15th of every month to monitor their financial healthiness.

New home prices rose by 0.12% last month, the slowest pace since February, as wider property curbs cooled demand, prompting developers to cut prices. Still, prices have gained every month since mid 2015.

China home prices have rebounded steadily since the coronavirus outbreak

For now, a renewed fear of missing out on price increases and an urge to guard against anticipated inflation are sustaining housing demand. Credit growth rebounded as monetary-policy easing continues to support the recovery from the pandemic.

Banks will be put into five categories and subject to different ceilings on their loans to developers and home buyers. While most of them had their current real estate exposure within the limits, those failing to comply will face additional capital charges, according to the statement.

The new policy can “help market participants form stable policy expectations, and help promote stable, healthy and sustainable development of the real estate market,” the statement said.

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