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China regulator tells banks to reassess loan risks
Published on: 2010-04-12
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April 12 (Bloomberg) -- China’s banking regulator told lenders to report on their risk exposure to borrowers including local-government companies by the end of June to help prevent the nation’s record credit boom from causing more bad loans.

Financial regulations in China will go “back to the basics,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said at the Boao Forum for Asia in Hainan province yesterday. Markets can never regulate and supervise themselves, he said.

The deadline reflects concern that borrowing by local governments and last year’s record $1.4 trillion in lending is fueling asset bubbles and may lead to soured debts. Local- government entities may have had 11.4 trillion yuan ($1.7 trillion) in outstanding debt by the end of last year, according to estimates from Northwestern University Professor Victor Shih.

“You can expect more Chinese government policies to contain the impact of this,” said Francis Lun, general manager at Hong Kong-based Fulbright Securities Ltd. Banks reassessing their risk is “a sensible thing to do given the amount of bank lending that went into stock and property speculation.”

Inspectors will visit banks in the third quarter to check on the reports, Liu said. “By the end of the third quarter we will downgrade assets if needed and increase provisions,” Liu added without elaborating.

‘Gigantic Wave’

Industrial and Commercial Bank of China Ltd., the nation’s biggest lender, fell 0.8 percent to HK$6.25 in Hong Kong trading as of 11:13 a.m. local time, extending this year’s loss to 3 percent. Rival China Construction Bank Corp. slid 0.87 percent.

Local governments in China have been raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on such loans could trigger a “gigantic wave” of bad debts as projects are left without funding, Shih said last month.

China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles, according to Yan Qingmin, head of the banking regulator’s Shanghai branch, last month.

The CBRC has told banks to track every piece of land developed by local governments’ financial vehicles, according to a transcript of Liu’s comments posted yesterday on http://money.163.com, a Chinese financial news portal. The regulator feels “a little bit assured” with some local governments who have a good record on debt repayment, he said.

Down Payments

Some lenders in Beijing have “voluntarily and prudently” raised down-payment requirements for second mortgages to 60 percent of a property’s value, the banking watchdog said in a statement elaborating on Liu’s speech. Nationwide, banks are asking for down payments of between 40 percent and 50 percent for second mortgages, Liu said.

China’s property prices rose 10.7 percent in February, the fastest pace in almost two years, fueling concern that money flowing into real estate from at home and abroad may cause a bubble.

Liu cited Shanghai and Beijing as examples of property markets affected by so-called “hot money” and speculation.

The government aims to cut new lending by 22 percent this year from last year’s record.

Officials last month raised deposit requirements for buyers at land auctions to 20 percent of the minimum price to increase costs for developers. They have also lifted banks’ reserve requirements twice this year and re-imposed a tax on home sales.

The CBRC ordered banks not to lend to developers holding land without building houses in a March 26 statement. It also asked banks to stop approving new credit lines to the 78 state- owned companies if they use collateral other than construction projects already in progress.

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