Loan fears hit Shanghai bourse

Mainland property and bank shares fell yesterday after the banking regulator urged lenders to step up supervision of developer loans and increase provisions for bad loans.

The China Banking Regulatory Commission (CBRC) has asked lenders to visit developers more often to better monitor risks and update valuations. The commission said in a third-quarter banking sector report that real estate sales had dropped in some cities, property prices were falling and developers generally faced tight cash supplies.

The Shanghai Composite Index ended down 1.9 per cent yesterday at the lowest level since late October, dragged down by property shares after official data showed that average home prices fell in October for the first time this year. Most bank shares retreated in Shanghai and Hong Kong trading.

The regulator asked lenders last week to step up asset sales and debt restructuring of unprofitable local government financing vehicles (LGFVs), which are struggling to repay loans.

'The Chinese authorities are expected to focus on controlling systemic risks, including those related to private banking and local government finance,' said Huang Yiping, an economist at Barclays Capital.

Problematic developers, LGFV loans and the growing private lending market are the main challenges facing the mainland's banking sector. Rising bad loans are the unintended result of the nation's stimulus package after banks helped the government pump massive amounts of funds into LGFVs and developer projects to revive the economy after the global financial crisis.

The private lending market has boomed as tighter monetary policies made it harder for small companies to access bank loans. However, the disappearance or suicide of several borrowers has generated widespread fears about financial stability.