China caps bank loans to real estate to curb systematic risk

Beijing

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 that took effect on Jan 1, loans to developers will be capped at 40 per cent for the nation's largest state-owned lenders.

Banks' mortgage lending should be no more than 32.5 per cent 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. "That will further dampen investor sentiment toward the real estate stocks."

A gauge of Shanghai-listed developer stocks slumped 10 per cent in 2020, while the benchmark Shanghai Composite Index rallied 14 per cent.

Early in 2020, China's housing watchdog and central bank asked 12 developers including China Evergrande Group, Sunac China Holdings Ltd and China Vanke 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 per cent in November 2020, the slowest pace since February, as wider property curbs cooled demand, prompting developers to cut prices. Still, prices have gained every month since the middle of 2015.

For now, a renewed fear of missing out on price increases and an urge to guard against anticipated inflation are sustaining housing demand. BLOOMBERG