# Exclusive-China regulator launches new probe into banks’ property loan exposure – sources
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-08-18
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: China Banking Regulator Scrutinising Property Loan
Meta Description: China's banking regulator is assessing property loan portfolios of local and foreign lenders to measure risks from the ongoing real estate sector turmoil.
URL: https://financedigest.com/exclusive-china-regulator-launches-new-probe-into-banks-property-loan-exposure-sourceshtml

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By Engen Tham and Ziyi Tang

SHANGHAI/BEIJING (Reuters) -China’s banking regulator is scrutinising property loan portfolios of some local and foreign lenders to assess systemic risks, sources with knowledge of the matter said, as a crisis in the real estate sector worsens and weighs heavily on the economy.

As part of their assessment, the China Banking and Insurance Regulatory Commission (CBIRC) is looking at banks’ loan book exposure to developers to find out if those credit decisions were made according to the rules, one of the sources said.

The aim is to measure risks to the financial system from the ongoing property sector turmoil in the [world’s second-largest economy](https://www.financedigest.com/biggest-economy-in-the-world.html "Biggest Economy in the World"), two of the sources said. It was not immediately clear what action the [regulator might take after the investigation](https://www.financedigest.com/australia-financial-crimes-regulator-opens-investigation-into-britains-entain.html "Australia financial crimes regulator opens investigation into Britain’s Entain").

The probe is different to the routine self-reporting the [regulator requires from banks](https://www.financedigest.com/exclusive-u-s-regulator-seeks-sale-of-silicon-valley-bank-signature-bank-portfolios-sources.html "Exclusive-U.S. regulator seeks sale of Silicon Valley Bank, Signature Bank portfolios-sources"), the sources said.

China’s economy narrowly avoided contracting in the second quarter as widespread COVID-19 lockdowns and the slumping [property sector badly damaged consumer and business](https://www.financedigest.com/the-importance-of-property-care-looking-after-your-business.html "The Importance of Property Care: Looking After Your Business") confidence. July data was much weaker than expected, with further signs of deterioration in the [housing and construction markets](https://www.financedigest.com/uk-housing-market-weakness-continues-improvement-on-the-horizon-rics.html "UK housing market weakness continues, improvement on the horizon – RICS").

The CBIRC did not respond to Reuters requests for comment.

All the sources declined to be identified due to the sensitivity of the matter.

The latest probe comes as policymakers have been trying to stabilise the property sector, which [accounts for a quarter of the economy](https://www.financedigest.com/the-sharing-economy-whats-in-it-for-accountants.html "THE SHARING ECONOMY: WHAT’S IN IT FOR ACCOUNTANTS?"), 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](https://www.financedigest.com/georgias-tbc-bank-slashes-loan-decision-time-with-fico-solution.html "Georgia’s TBC Bank Slashes Loan Decision Time with FICO Solution") to embattled developers, while managing lending risks.

Property [loans accounted for 25.7% of total banking sector credit](https://www.financedigest.com/4-ways-to-get-a-bad-credit-loan.html "4 Ways to Get a Bad Credit Loan") in China as of end-June, central bank data showed. The [banking sector’s](https://www.financedigest.com/sterling-rises-as-receding-bank-sector-worries-lift-sentiment.html "Sterling rises as receding bank sector worries lift sentiment") 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](https://www.financedigest.com/first-abu-dhabi-bank-reiterates-not-eyeing-offer-for-standard-chartered.html "First Abu Dhabi Bank reiterates not eyeing offer for Standard Chartered") lend to property firms.

Reuters could not determine whether HSBC and StanChart, two of the biggest [foreign banks in China](https://www.financedigest.com/first-foreign-covid-vaccines-head-to-china-from-germany.html "First foreign COVID vaccines head to China from Germany"), are part of the latest investigation. [HSBC and StanChart](https://www.financedigest.com/hsbc-stanchart-face-pressure-from-hong-kong-to-take-on-crypto-clients-ft.html "HSBC, StanChart face pressure from Hong Kong to take on crypto clients – FT") declined to comment.

The [debt crisis in China’s](https://www.financedigest.com/analysis-no-china-no-deal-bid-to-break-sovereign-debt-logjams-gets-weary-thumbs-up.html "Analysis-No China, no deal: Bid to break sovereign debt logjams gets weary thumbs up") property sector has worsened in recent weeks after a growing number of homebuyers threatened to stop making mortgage payments on stalled property projects, aggravating a crisis that could lead to social instability.

The CBIRC is also asking some [developers for details of their cash positions and the source](https://www.financedigest.com/china-most-promising-source-of-funds-for-overseas-developers-reveals-investorist.html "China ‘most promising source of funds’ for overseas developers, reveals Investorist") of money for debt repayments, a third banking source said.

Beijing’s [launch of tough leverage rules for developers in recent years has led to cashflow issues](https://www.financedigest.com/gsk-expects-us-launch-of-rsv-vaccine-with-no-supply-issues.html "GSK expects US launch of RSV vaccine with no supply 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,”](https://www.financedigest.com/preventing-an-operationally-crippling-ransomware-attack-do-you-know-where-your-risk-exposure-lies.html "PREVENTING AN OPERATIONALLY CRIPPLING RANSOMWARE ATTACK –  DO YOU KNOW WHERE YOUR RISK EXPOSURE LIES?") 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](https://www.financedigest.com/anti-money-laundering-time-to-take-a-new-approach.html "ANTI-MONEY LAUNDERING: TIME TO TAKE A NEW APPROACH?"), sometimes over many weeks for additional documents on lending to specific developers, two of the sources said.

A potential rise in [mortgage defaults raises risks for banks](https://www.financedigest.com/britain-urges-banks-to-offer-mortgage-flexibility-in-cost-of-living-crisis.html "Britain urges banks to offer mortgage flexibility in cost-of-living crisis") and developers.

The risk of new NPLs (non-performing loans) will remain a threat to [banks’ asset quality,” said rating](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout") agency Moody’s in a June note.

Commercial [banks’ non-performing loan ratio stood at 1.67% at the end](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") of June, down from 1.73% at the beginning of this year, according to CBIRC data, though many analysts believe the real number is much higher.

New [bank lending in China tumbled more than expected in July while broad credit](https://www.financedigest.com/credit-agricole-launches-china-ma-and-investment-banking-business.html "Credit Agricole launches China M&A and investment banking business") growth slowed, as fresh COVID-19 flare-ups, worries about jobs and the property crisis made companies and consumers wary of taking on more debt.

The property sector’s credit troubles [risk seeping into secondary industries such as asset](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") management companies, privately-owned construction firms and small steelmakers, said Fitch Ratings in an August note.

($1 = 6.7890 Chinese yuan)

(Editing by Sumeet Chatterjee, Jacqueline Wong and Kim Coghill)


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