Chinese Property Loans Biggest Risk to Banks

The $364 Billion Real Estate Threat Inside China’s Biggest Banks

Corporate loans backed by buildings have grown almost fivefold since 2008 and residential mortgages have more than tripled in the period among lenders rated by Fitch, the company said Friday. That’s seen property loans held by China’s four biggest lenders soar to a total 2.26 trillion yuan ($364 billion), according to their annual reports.

“Collateral is supposed to reduce bank risk -- but the rise of property collateral in corporate loans may actually increase the chance of bank failure,” Fitch analysts Jack Yuan and Grace Wu said in the report. “This is because the widespread use of such collateral has lowered the perceived risks of lending, fueling China’s credit build-up and spreading real-estate risk to other sectors of the economy.”

...Loans backed by properties now comprise 40 percent of all facilities held by Fitch-rated banks, according to the report. Total credit to real estate could be as high as 60 percent if other types of financing besides direct loans are included, Fitch said.

“The property market is usually one of the main revenue contributors to the state,” said Raymond Chia, the head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. “With the weakness in the sector, especially with excess inventory overhang as well as weak earnings by developers, economic growth will be affected.”