China's banking regulator said it sees growing credit risks in the nation's real estate industry and warned of increasing pressure from nonperforming loans.
Risks associated with home mortgages are growing and a "chain effect" may reappear in real estate development loans, the China Banking Regulatory Commission said in its annual report published on its website Tuesday.
The regulator has told banks to report on risk exposure by the end of June to help prevent a credit boom from leading to more bad loans. Property price gains spurred concerns that a record 9.59 trillion yuan ($1.4 trillion) of loans extended last year to combat the effects of the global financial crisis may be causing asset bubbles.
China is "closely monitoring the growth in the volume and the quality of mortgage loans, but we don't think it has reached an alarming level," said Kelvin Lau, a Hong Kong economist at Standard Chartered PLC. "There are still many tools the central government can use to tackle the problem if things get out of control."
Credit risks in some industries that have seen a surge in investment may "emerge soon" as restructuring efforts intensify, the CBRC said in the report. The rise in investment exacerbated the problem of excess capacity and overdevelopment, it said. The Shanghai composite index, which tracks China's bigger stock exchanges, has dropped 22% this year.
"Coming through the global financial crisis, China's banking sector has stepped onto a new level," the CBRC's chairman, Liu Mingkang, said in the report. "We remain coolheaded about the weaknesses to be addressed and fixed."
China's "experimental" approach to reining in asset bubbles may help it avoid a U.S.-style housing market crash, Jeremy Grantham, chief investment strategist at Grantham, Mayo, Van Otterloo & Co., said in Sydney.
The CBRC's report comes as Agricultural Bank of China Ltd., the country's largest by customers, prepares to sell shares in Shanghai and Hong Kong in what could be the world's largest initial public offering. Agricultural Bank may raise at least $23 billion from the total offering, people with knowledge of the matter said last week.
China's financial institutions reported 668.4 billion yuan ($97.9 billion) of combined profits in 2009, a 15% gain from 2008, according to the report.
China's economy, the world's fastest growing, expanded 11.9% in the first quarter from a year earlier. Measures to cool the real estate market included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second-home purchases.
Property prices in China rose 12.4% in May, the second-fastest pace on record, showing little sign yet that the government crackdown on speculation will work to avert an asset-price bubble.
Some banks in China have transferred loans off their balance sheets in an effort to circumvent regulatory requirements and capital and loan-loss provisioning, the CBRC said in the report. Banks still assume the risks related to loan management and recovery even though the loans are not booked on their balance sheets, it said. As a result, rising risks associated with banks' activities in transferring their exposures off the balance sheet need "close supervisory attention."
