China slaps new curbs on developers to tame runaway home prices by hitting them where they hurt most: bank loans

Beijing’s new rules limiting property bank loans are likely to hit Chinese developers hard and weigh on the momentum of a major economic growth engine this year, say analysts

The new policies may let some air out of the speculative bubbles that have defied the central bank’s cooling measures since 2017

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The Chinese government is eager to prevent a collapse of the property market from spilling over into systemic risk. Photo: Reuters

Published: 11:00am, 7 Jan 2021Updated: 10:57pm, 7 Jan 2021

China’s financial regulators have slapped their most draconian rules yet on the 16 trillion yuan (US$2.5 trillion) real estate industry, hitting the country’s highly leveraged developers where they hurt most: their bank loans.

A new concentration management system (CMS), which took effect on January 1, limits banks’ property-related lending to their capitalisation based on a five-tier grade. The central bank’s much-vaunted “three red lines” – financial requirements that decide whether developers can borrow – have also kicked in to limit the banking system’s exposure to the property sector.

The new policies may let some air out of the speculative bubbles in the residential property market which have defied the central bank’s deflating attempts since 2017. The Chinese government is anxious to prevent any collapse of the highly leveraged property market from spilling over into systemic risk, especially while economic growth is tentative amid the global coronavirus pandemic.

Still, the measures add more pressure to the industry, which has been stymied from receiving capital even during the nation’s liquidity easing of 2020. Any overkill of the cooling measures could slow one of China’s main growth engines – residential sales and prices are expected to decline in 2021 – to such an extend that it may become a major blow to economic recovery.

“Investment in infrastructure and property led the economic recovery [in China] last year,” said Qu Hongbin, chief China economist at HSBC. “Those two engines may slow in 2021 as government bond issuance shrinks and financing rules for property developers tighten. But investment in manufacturing should rebound on the back of stronger demand, rising capacity utilisation and more digitalisation.”

Based on the types and asset scales of the banks, the CMS sets caps for the proportion of outstanding property loans to total loans in five different bank tiers. Well capitalised Tier 1 banks can lend the most, while the small, underfunded Tier 5 lenders that operate in villages or local-area limits are permitted to extend the most modest loans.

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