China’s Bank Regulator Sees Growing Real Estate Risks

China’s banking regulator said it sees growing credit risks in the nation’s real-estate industry and warned of increasing pressure from non-performing loans.

Risks associated with home mortgages are growing and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report published on its website today.

The regulator has told banks to report on risk exposure by the end of June to help prevent a credit boom from leading to more bad loans. Property-price gains spurred concerns that a record 9.59 trillion yuan ($1.4 trillion) of loans extended last year to combat the effects of the global financial crisis may be causing asset bubbles.

“Coming through the global financial crisis, China’s banking sector has stepped onto a new level,” CBRC Chairman Liu Mingkang said in the report. “We remain cool-headed about the weaknesses to be addressed and fixed.”

Credit risks in some industries that have seen a surge in investment may “emerge soon” as restructuring efforts intensify, the regulator said in the report. The rise in investment exacerbated the problem of excess capacity and over- development, it said.

Economic Growth

The country, the world’s fastest-growing major economy, expanded 11.9 percent in the first quarter from a year earlier. Measures to cool the real-estate market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second-home purchases.

China’s property prices rose 12.4 percent in May, the second-fastest pace on record, showing little sign yet that the government crackdown on speculation will work to avert an asset- price bubble. The gain compared with a record 12.8 percent increase in April from a year earlier.

Some banks in China have transferred loans off their balance sheets in an effort to circumvent regulatory requirements and capital and loan-loss provisioning, the CBRC said in the report.

Banks still assume the risks related to loan management and recovery even though the loans are not booked on their balance sheets, the report said. As a result, rising risks associated with banks’ activities in transferring their exposures off the balance sheet need “close supervisory attention,” according to the CBRC.

The forces driving a sustained growth in China’s economy remain weak, it said. Structural imbalances are “acute,” external trade is threatened by rising protectionism and unemployment pressures remain severe, according to the report.

“All these pose further constraint for a substantial and meaningful rebound,” the report said.

China’s changing macroeconomic environment and the acceleration of the economic restructuring means the possibility of a resurgence in credit risks or losses “remains high,” the watchdog said in the annual report.