Property 'biggest risk' for lenders

PUBLISHED : Wednesday, 31 August, 2011, 12:00am
UPDATED : Wednesday, 31 August, 2011, 12:00am


Mainland banks' lending exposure to the property sector will be 'much more difficult' to deal with than debt-laden local governments, Fitch Ratings has warned.

The property sector, which affects 'almost every aspect of the economy', not only poses default risks for banks' direct lending but also other borrowers that speculate on it, said Charlene Chu, Fitch senior director of financial institutions.

Until now, mainland regulators considered the indebtedness of local governments and their financing vehicles the biggest risk faced by the world's second-largest economy.

Local governments borrowed heavily to fund infrastructure construction projects to grapple with the global financial crisis in 2009 and last year.

Local governments' outstanding liabilities stood at 10.7 trillion yuan (HK$13.06 trillion) at the end of last year, according to the National Audit Office - nearly 27 per cent of gross domestic product. Some of these projects are not expected to be able to repay their loans.

However, the risk brought by a property boom and bust could be even larger than that posed by troubled local government loans, according to Fitch analysts.

Residential construction on the mainland may have been 'excessive' and as a percentage of GDP is now above the levels in Spain before its housing market crashed in 2007, said Andrew Colquhoun, Asia-Pacific head of sovereign ratings at Fitch.

The mainland has been heavily reliant on fixed-asset investment to drive economic growth in the past few years. Concerned that a bubble in the property market could threaten social stability, the central government has introduced a slew of policies this year to crack down on speculation and encourage government-subsidised housing for the poor.

In March, Premier Wen Jiabao said the government would build 10 million social housing units this year and another 10 million next year.

Investment in housing surged 36.4 per cent from a year ago to 2.28 trillion yuan in the first seven months, according to the National Bureau of Statistics.

With the introduction of cooling measures and projected supply rising, price declines are expected down the road. Li Sze-lim, chairman of R&F Properties, believes flat prices will drop 10 per cent in the second half of the year in cities such as Beijing, Tianjin and Guangzhou.

Liu Mingkang, chairman of the China Banking Regulatory Commission, said last month that stress tests had indicated mainland banks would be able to withstand the impact even if property prices fell 50 per cent.

But analysts say the stress tests did not take into account a chain reaction brought on by dampened demand for steel, cement and other building materials and equipment.

Fitch is worried about a future rise in overdue loans, a scenario which mainland banks are not well-positioned to handle, according to Chu.

Combined overdue loans at the 14 listed banks which have released first-half results rose 6.35 per cent to 385.97 billion yuan in the January to June period.

China Minsheng Banking, which posted an increase in overdue loans of nearly 25 per cent, said corporate overdue loans were mainly from the real estate and manufacturing sectors.


Home sales increased this much in the first seven months from 2010

- Prices rose in the first half in 67 of 70 government-monitored cities