A new report from Moody’s Investors Service highlights the mounting risk posed by China’s property sector to the health of the financial system.
Moody’s analysts say that weakening protections for the Chinese finance system make it more vulnerable to any further upsets in the real estate market.
“Some buffers protecting the financial system are eroding, which would pose risks if the property downturn becomes protracted,” the report said.
“Although the authorities continue to have tools to prevent a systemic financial crisis, some of these buffers are weakening, and could pose risks if the property downturn endures,” said Lillian Li, vice president and senior credit officer with Moody’s, in a media statement.
“The changing domestic and external macro environment is contributing to lower policy effectiveness; the government’s capacity to provide support has become more constrained; and while financial stability remains a top priority, the authorities have become more selective in their willingness to provide support.”
Moody’s highlighted in particular the vulnerability of smaller banks compared to larger lenders that are subject to heightened scrutiny from central government regulators.
“While large banks remain well capitalised and can absorb significant losses, smaller banks are much more exposed to continued problems in the property sector,” Moody’s said.
Risks for Chinese banks vis-a-vis the property sector include loans to the real estate supply chain, worsening asset quality amidst weaker economic growth, and declining collateral values.