Chinese government economists and regulators are speaking publicly about systemic risks in real estate. Officials fear that state-owned commercial banks have been too profligate in their lending policies, contributing to a 10.2% year-over-year increase in housing prices across the country even as demand has been slackening. FT:
Liu Mingkang, China’s top banking regulator, has in recent days urged the country’s state-owned commercial banks to beware of risks in the real estate sector and ordered them to tighten loan approval processes.
Lending standards at Chinese banks are notoriously lax. The Chinese government uses the institutions as cash machines to provide cheap financing with little regard for the risk or profitability of the issued loans in order to fuel China’s unprecedented economic expansion.
In 2006, Ernst & Young estimated that there were $900 billion worth of non-performing loans on the books of Chinese banks. Official Chinese government statistics (infamously inaccurate) released this summer put NPL’s at $172 billion, or roughly 6.1% of the total asset base.
Because the Chinese government backs the shaky credit system with billions of dollars worth of foreign reserves, and because personal savings rates in China are quite high, the risk of a complete collapse is remote. But as speculation continues to surge, some observers are beginning to worry:
“If financial institutions of Freddie Mac and Fannie Mae’s calibre could get into such a bad situation, then what does that mean for Chinese financial institutions?” asked Yi Xianrong, a prominent economist at the China Academy of Social Sciences. “The only reason we haven’t seen similar problems here is because property prices have continued to rise rapidly.”