China’s central bank has given banks a red line on the percentage of real estate loans.
Changes in China’s property market began with finance, as China’s central bank gave banks a red line on the percentage of real estate loans, touching a number of banks and affecting at least 22 listed real estate companies, officially identifying real estate as the biggest “gray rhinoceros” in terms of financial risk in China at this stage.
On December 31, 2020, the Central Bank of China and the CBRC jointly issued the Notice on the Establishment of a Concentration Management System for Real Estate Loans of Banking Financial Institutions (the Notice), which set separate caps on the percentage of real estate loans and the percentage of personal housing loans of banking financial institutions.
The content of the Notice is mainly to the large Chinese banks, medium-sized Chinese banks, small Chinese banks and non-county agricultural cooperation institutions, county agricultural cooperation institutions, village banks, five grades of banking financial institutions were set “two red lines”, real estate loans accounted for 40%, 27.5%, 22.5%, 17.5% and The upper limit of real estate loans is 40%, 27.5%, 22.5%, 17.5% and 12.5%, and the upper limit of personal housing loans is 32.5%, 20%, 17.5%, 12.5% and 7.5% in that order.
China’s central bank has drawn a red line for banks. (Photo credit: Chinese central bank website)
To avoid a strong impact from the policy, officials have set a transition period for adjustment for banking financial institutions that exceed the limit.
Among the five brackets, the first bracket is mainly for large state-owned selected banks, none of which exceeded the limit for real estate loans. Banks in the second and following brackets all exceeded the limit, which means that real estate has been deeply tied to China’s financial sector.
For example, China Merchants Bank and Industrial Bank exceeded the 27.5% ceiling by 5.7 percentage points and 6.2 percentage points, respectively; Pudong Development Bank and Ping An Bank exceeded the 27.5% ceiling by 0.4 percentage points and 1.8 percentage points, respectively.
According to the data of some real estate companies, a rough count of 22 listed real estate companies, such as Beyoncé Garden, Sunrise Holdings, Sunac China, Sino-Ocean Group and Midea Land, were affected. Banks that touch the official red line will tighten real estate loans, and the pressure on financing for real estate companies will further increase in the future.
On January 9, according to the First Financial News, banks are still in the process of studying and sorting out the new regulations, and there is no concrete implementation plan to the branch and sub-branch levels. The head of a listed bank branch said, “The income from real estate loans is relatively high, we are profit-oriented after all, but the risk control will still be good. The new regulations will certainly have an impact on us, as long as there is enough time, we can certainly solve the problem, and may be more strict and prudent in the expansion of new subjects and the evaluation of projects.”
The head of a real estate industry research institution said, “segmentation, banks will pay more attention to the quality of lending, the impact on commercial properties more, the layout of the third and fourth line more enterprises will be greater. In addition, because there are more financing channels for large real estate enterprises, small and medium-sized real estate enterprises that rely more on small and medium-sized bank loans will be hit harder by the new regulations.”
Ni Pengfei, a researcher at the Academy of Financial and Strategic Studies of the Chinese Academy of Social Sciences, said the banking industry’s exposure to real estate loans remains large and its asset quality is vulnerable to the impact of real estate price fluctuations, a potential risk point that requires close attention.
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, published an article not long ago, “Improving the modern financial regulatory system,” saying he was determined to curb the real estate bubble, which is deeply linked to the financial sector. China’s real estate-related loans account for 39% of the banking sector loans, and there are also a large number of bonds, equity, trusts and other funds entering the real estate industry. It can be said that real estate is the biggest “gray rhino” in terms of financial risk in China at this stage.
The metaphor of “gray rhinoceros” originates from economist Michel Walker’s book “The Grey Rhino: How to deal with probable crises”, in which Michel Walker argues that similar to the “black swan” which is a metaphor for a small probable event with huge impact, the “grey rhino” can be a metaphor for a large probable potential crisis with huge impact.
Overall, the changes in China’s property market have started with finance.
China’s financial regulators also issued “three red lines” for real estate developers last year. The so-called “three red lines”: 1) gearing ratio after excluding pre-receipts is greater than 70%; 2) net debt ratio is greater than 100%; 3) cash to short term debt ratio is less than 1 times.
If all three red lines are hit, the interest-bearing liabilities of real estate developers cannot be increased. If two of them are hit, the annual growth rate of interest-bearing liabilities shall not exceed 5%; if one is hit, the growth rate shall not exceed 10%; if one is not hit, the growth rate shall not exceed 15%.
At present, the problem of housing prices in China’s big cities has become very prominent. The average price of a commercial house in mainland China is now close to RMB 10,000, while the prices in Beijing, Shanghai and Shenzhen have all exceeded RMB 60,000, while Guangzhou, Hangzhou and Xiamen have exceeded RMB 30,000, and some provincial capitals have set record highs with prices exceeding RMB 20,000.
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