PBOC Financial Stability Report Warns of Excessive Property Lending

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A new report from the Chinese central bank claims that credit creation continues to be excessively concentrated in the real estate sector, leading to the risk of bubble formation in some areas.

The People’s Bank of China released its “2017 China Financial Stability Report” on June 4, which purports to provide a comprehensive assessment of the stability of the country’s financial system.

With respect to the real estate market, the PBOC  that new loans remain excessively concentrated in the property sector, and that there is a risk of bubbles emerging in some parts of the country.

This is particularly the case in some tier 1 and tier 2 cities where housing prices continue to rise too rapidly, with initial down payments and mortgage loans serving to reinforce gains and blow bubbles even bigger.

The report reveals that as of the end of 2016 the bank housing loan balance was 26.7 trillion yuan, for a gain of 5.7 trillion yuan since the end of 2016.

Housing loans comprised 25% of all loans, for a gain of 2.7 percentage points since the start of the year, as well as accounted for 44.8%  of all new lending.

The housing NPL balance was 66 billion, for a non-performing rate of 0.77%.

The report views China’s financial sector as being “stable overall,” advocating the continuation of stable and neutral monetary policy in 2017 as well as the maintenance of rationally adjusted, stable liquidity levels in order to provide the real economy with a sound monetary environment for growth.

The report notes that bank balance sheets continued to grow in 2016 with some relent in downward pressure on asset quality, and that credit risk remains controllable in general.

With respect to credit risk, the report notes that a sizeable number of enterprises receiving over 100 million yuan in funding from banks were subject to debt default events, with risk primarily concentrated in low-end manufacturing sectors and industries with excessive capacity.

The report notes that the locus of risk incidents has shifted from traditional deposit operations to interbank and off-balance sheet business.

When it comes to exchange rates, the report notes while the Chinese yuan saw some depreciation against the US dollar last year, the rate of decline against major advanced economies and emerging markets was markedly less

The report advocates further market reforms of the exchange rate, including improvements to mechanisms for the marketisation of the rate and expansion of the ability of the market to determine rates, in order to shore up the Renminbi’s stable position within the global monetary system.

According to the report as the efficiency and quality of China’s economic growth continues to rise, the fundamental factors underlying the RMB exchange rate will become “firmer” which will both increase flexibility as well as provide the conditions for the maintenance of basic stability.

PBOC says the Chinese financial sector has enhanced its risk-resistance capability, particularly with respect to the capital adequacy ratios of key commercial banks and their provisioning levels, as well as the tools and methods that financial management departments have at their disposal.

The report emphasised the need to raise and improve regulatory capability in 2017, strengthening financial regulatory coordination, as well as the shoring up of systemically important financial institutions, financial holding companies and key financial infrastructure, and the promotion of more standardised asset management product systems.

 

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