China's banks must report on the quality of their loan books by the end of June and take fresh steps to rein in risky lending to land developers, the chief banking regulator said on Sunday.
Liu Mingkang, head of the China Banking Regulatory Commission, said he had ordered banks in particular to check "project by project" loans extended to local governments' special investment vehicles, which borrowed 36.5 percent of last year's record 9.6 trillion yuan ($878.97 billion) in new lending.
Loan officers must ensure that these investment vehicles are generating sufficient cash flow to service their debts and, if necessary, amend the loan covenants and demand more collateral.
The CBRC will send inspection teams into banks next quarter to ensure any irregularities have been rectified, Liu told the Boao Forum on the southern island of Hainan.
Some academics and investors have expressed concern that many of the loans made to local governments as part of the government's anti-crisis pump-priming package could turn sour.
Liu said he had the backing of the State Council, China's cabinet, to set a very rigid timetable for banks to reassess their loans and rectify terms as necessary.
"We have limited resources, but we must get focused on the most important areas. If we can do that, we will feel comfortable in the years to come," Liu said.
He also warned banks to be selective in supporting real estate developers and said the CBRC had instructed banks to lower loan-to-value ratios when lending to companies acquiring land.
Land prices more than doubled last year and some plots in Beijing have fetched record prices this year, snapped up by state-owned enterprises (SOEs) whose core business has nothing to do with real estate development.
The government has since ordered 78 SOEs to divest such non-core businesses, and Liu said the principle that the highest bidder should win a land auction was not appropriate in China.
The CBRC has ordered lenders to lend against the collateral of construction projects that are under way, not undeveloped land, and encouraged them to lend only to a limited list of developers with a good track records, Liu said.
Liu said banks should not make loans to property speculators. If they have doubts about the motives of someone seeking a mortgage for a second or third home, they should charge more for the loan and demand a higher down payment.
He noted that some banks in Beijing were now requiring buyers of second homes to make a down payment of more than 60 percent of the value of the property. The minimum set by the CBRC is 40 percent. First-time owner-occupiers taking out a mortgage need a down payment of only 20 percent.
Liu said he felt comfortable about the level of mortgage risk in China as underlying demand for housing remained strong. Moreover, most first-home buyers were paying a down payment of 30 percent and second-home buyers were providing 40-50 percent.
Banks had made provisions equal to 166 percent of their bad loans to the real estate sector, he said.
"We have enough bullets to fight against possible downward risks in that market," Liu, who was speaking in English, said.
Liu's remarks and actions are the latest stage in a campaign by the authorities to ensure that last year's credit splurge and fast-rising property prices do not sow a new crop of bad loans.
To that end, the CBRC has pushed banks to raise fresh funds to bolster capital ratios depleted by last year's lending spree. The CBRC has also ordered banks to increase loan loss provisions. The property sector, a central pillar of the Chinese economy, is at the core of the CBRC's concerns.
Beijing faces the balancing act of continuing to promote widespread home ownership while deterring speculative investment that has driven prices in major cities beyond the reach of ordinary Chinese, prompting widespread grumbling.
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