China's Banking Regulator Warns of Bad Property Loan Risks

[HenryTo]

This article gives one a basic idea of how rampant real estate speculation has been in Shanghai and other major cities in China:
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China's Banking Regulator Warns of Bad Property Loan Risks

Jan. 12 (Bloomberg) -- Industrial & Commercial Bank of China and Bank of China, preparing to become public companies, are among lenders criticized by the country's banking regulator for being lax in extending risky loans to property companies.

``Some commercial banks were found to be weak in risk- consciousness and directly extended loans to companies which have insufficient capital,'' the China Banking Regulatory Commission said in a document submitted to the country's banks and given to Bloomberg News yesterday.

China's biggest state-owned banks have been seeking international expertise as they try to reduce bad loans and improve governance in preparation for overseas share sales this year. Industrial Bank, Bank of China and China Construction Bank have received a combined $60 billion in bailouts since 2003.

``Bad loans will surface if property prices continue to fall,'' said Qiu Zhicheng, a Shanghai-based analyst at Haitong Securities Co. ``This is the kind of uncertainty that troubles overseas investors in Chinese lenders, especially big state banks.''

By the end of September, China's four biggest state banks had 1 trillion yuan ($124 billion) of bad loans, accounting for 10.1 percent of their total lending. That's higher than the 4.5 percent bad-loan ratio at the nation's stock-holding banks and the industry's 8.6 percent average.

Li Shaopeng, a spokesman of China Banking Regulatory Commission, declined to comment on the document.

Tighter Controls

The regulator is urging lenders to institute tighter lending controls to real-estate companies as they prepare to compete against foreign rivals that will have unfettered access to the banking industry of the world's fastest-growing top 10 economy.

``Some banks are lax in internal controls, and there are fairly big risks in real estate loans,'' said the document, which was written in Chinese and dated Dec. 31.

The regulator conducted a ``special inspection'' of real estate loans in eight cities, including Shanghai and Chongqing, where ``property prices rose fast and speculation was rampant,'' the document said.

The regulator submitted examples of lax lending in the document. It said a developer in Hangzhou used one project to repeatedly secure lending from five banks, including Industrial Bank and Bank of China. For a project that cost 350 million yuan, the company borrowed a total of 662 million yuan.

Bank of China in 2004 lent 50 million yuan to Jiangsu Zhongzhu Real Estate Co., whose debt-to-asset ratio was 92 percent, according to the commission's document.

Xie Wen, a spokeswoman at Industrial Bank, and Jin Chenchen, a spokesman at Bank of China, declined to comment.

Maintaining Curbs

China's property market has been declining since June, when new taxes aimed at speculators halted a six-year boom. The country has maintained curbs on land approvals and urged banks to restrict lending to industries including real estate and steel to cool investment that has raised inflation concerns in Asia's second- largest economy.

Property sales in the world's most populous country will grow 30 percent in the first six months of the year before slowing to 20 percent in the second half, a unit of National Development and Reform Commission said in a report published today, which warned of the need to ``avoid the rise of a property bubble.''

In Shanghai, the nation's most expensive market, home prices dropped 10 percent between June and November, after more than doubling since 1999, according to the city government's Shanghai Home Index.

In the eight cities covered by the commission's report, real estate companies' borrowings on average account for 70 percent of their assets, the regulator said. That compares with 10 percent for Li Ka-shing's Cheung Kong (Holdings) Ltd., Hong Kong's biggest builder, at the end of 2004.

`Excessive Expansion'

In the eight cities, ``some developers borrow from banks to fund their excessive expansion,'' the commission said. The six other cities covered by the regulator's inspection were Hangzhou, Nanjing, Tianjin, Shenyang, Ningbo and Qingdao.

``Delayed project construction, sales or big price fluctuations can easily transfer risks to banks, resulting in non- performing assets,'' the commission said. China's property market may spawn as much as 525 billion yuan in bad loans, Ernst & Young LLP said in a September report.

Developers used a number of methods to mislead lenders, such as using parent companies to borrow from banks to get around restrictions to limit lending to real-estate businesses, the regulator said.

The regulator found that as of March last year, fake loans accounted for 81 percent of non-performing housing loans at Industrial Bank's Liaoning branch, in northeast China. The bad loans, totaling 360 million yuan, accumulated largely because of fake transactions, such as a borrower taking out a mortgage and using the money for a purpose other than purchasing property, the document said.

To contact the reporter on this story:
Samuel Shen in Shanghai Sshen3@bloomberg.net
Last Updated: January 11, 2006 22:23 EST