Bloomberg News

China Said to Warn Banks on Property, Local Government Loans

November 30, 2011

(Updates with share prices in sixth paragraph.)

Nov. 18 (Bloomberg) -- China’s banking regulator warned lenders that some projects backed by local governments may run out of funds, and loans to property developers are likely to sour as sales slow, a person with knowledge of the matter said.

The China Banking Regulatory Commission told lenders last week to step up asset sales and debt restructuring for unprofitable local government financing vehicles that are struggling to repay loans, the person said, declining to be identified as the instructions were private. The watchdog also said banks should cut “high-risk” loans to developers, the person said.

China’s banking regulator tightened capital requirements and clamped down on off-balance sheet assets this year. Still, the International Monetary Fund this week called for closer oversight of the banks as risks increase. Home sales plunged 25 percent in October from the previous month. Industrial & Commercial Bank of China Ltd. and its three biggest local rivals have lost about $71 billion in market value this year.

“The government is still very careful about the property market as it doesn’t want volatility in housing prices,” Ivan Li, deputy head of research at Kim Eng Securities Hong Kong Ltd., said by telephone today. “You can see there are pressures building up: The government is worried that some developers may shut down, triggering defaults on bank loans.”

A Beijing-based press official for the banking watchdog said he couldn’t immediately comment. The regulator told banks to “pay close attention” to property loan risks as falling home prices and sales are straining developers’ finances, according to a third-quarter report posted yesterday on the CBRC’s website.

Shares Decline

Shares of the four largest banks fell, led lower by Agricultural Bank of China Ltd. The nation’s fourth-largest lender dropped 3.4 percent to HK$3.35 as of 11:05 a.m., and ICBC declined 3.1 percent to HK$4.44, helping pull the Hang Seng Index to a 1.9 percent loss.

China last month named its securities regulator Shang Fulin to replace Liu Mingkang as head of the CBRC, putting him in charge of a 106 trillion-yuan ($17 trillion) industry that includes four of the world’s eight largest lenders by market value. His appointment was part of the biggest reshuffle of financial officials in China in a decade.

Premier Wen Jiabao’s battle to lower housing prices in China began in April last year, when the cabinet raised minimum mortgage rates and down-payment ratios for some home purchases, saying “more forceful” steps were needed to cool speculation. Authorities tightened the rules further this year and imposed housing purchase restrictions in about 40 cities.

Home Prices Fall

Home prices fell in 33 of 70 cities monitored by the government in October, the statistics bureau said today. Prices may fall as much as 30 percent in the next year, Barclays Plc’s research unit said last week. They had risen by 140 percent from 1998 to the end of last year, according to the bureau.

Wen said during a Nov. 7 visit to Russia that the country won’t waver on its property market curbs.

The CBRC told lenders to visit developers that have borrowed money, the person said. The watchdog expressed concern that property companies have raised additional financing from non-bank lenders, trusts and bond sales, which may curtail their ability to make repayments on bank loans, the person said.

The regulator said some developers have used projects funded by such bank loans to improperly raise funds from trusts, which may trigger “major credit risks,” according to the person. Property loans that need to be restructured should be classified as “substandard” at a minimum and downgraded, the watchdog said.

IMF Cites ‘Vulnerabilities’

“Despite ongoing reform and financial strength, China confronts a steady buildup of financial sector vulnerabilities,” the Washington-based IMF said in its first formal evaluation of the Chinese system on Nov. 15. Banks need to upgrade risk-management systems, and the central bank and regulators should add skilled personnel and disclosure standards must be raised, the IMF said.

ICBC and its three closest local rivals have declined an average 21 percent in Hong Kong trading this year. Investor concern has mounted that defaults by small companies, developers and local governments will climb and endanger growth in the world’s second-largest economy.

The CBRC last week told banks to inspect loans to local government financing vehicles, 35 percent of whose debt matures in the next three years, the person said.

Roads, Bridges

Local governments, previously barred from directly selling bonds or borrowing from banks to pay for projects including roads and bridges, set up more than 6,000 financing vehicles and amassed 10.7 trillion yuan ($1.7 trillion) of debt by the end of 2010, with 80 percent owed to banks, the National Audit Office said in a June report.

Premier Wen had ordered the first audit of local-government borrowing in March, amid concern spending designed to support the economy following the 2008 global financial crisis would leave a legacy of bad debt.

The regulator warned last week that some local governments are circumventing regulatory restrictions and raising funds by using companies that aren’t classified as financing vehicles, the person said.

The banking regulator said it will also stop approving the sale of wealth-management products with maturities of one month or less, the person said. That move was reported earlier by 21st Century Business Herald, which cited unidentified people.

--Stephanie Wong, with assistance from Hugh Son in New York and Stephanie Tong in Hong Kong. Editors: Chitra Somayaji, Nathaniel Espino

To contact Bloomberg News staff for this story: Stephanie Wong in Shanghai at swong139@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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