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China Said to Tell Banks to Tighten Property Lending as Curbs Take Effect

Chinese regulators have told banks to tighten lending for real estate on concern credit risks will increase as the impact of government curbs deepens in the next three to five months, a person familiar with the matter said.

The China Banking Regulatory Commission told lenders last month not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial properties than residential, the person said, declining to be identified as the discussions were private.

The regulator aims to guard against the risk of bad loans should government efforts to cool the market cause property prices to fall. China’s home prices rose at the slowest pace in 11 months in July after the government imposed limits on purchases, mortgages and land sales as part of a campaign that’s lasted for more than a year.

China Vanke Co., the nation’s biggest listed property developer, fell 1.2 percent to 8.45 yuan as of 10:23 a.m. in Shenzhen trading. The nation’s benchmark Shanghai Composite Index rose 0.6 percent. Poly Real Estate Group Co. dropped 0.5 percent and Gemdale Corp. fell 0.2 percent in Shanghai.

The market rout this month sparked by concerns the global economy may be faltering won’t persuade Chinese regulators to ease their efforts to rein in property, said Minzu Securities Co. analyst Cui Juan.

Implement Rules

The banking regulator, in an e-mailed response to questions, said banks should enhance their monitoring of non-residential property loans, including commercial property-collateralized loans and consumer loans. Lenders should also prevent bank loans from “illegally flowing” into the property market, it said.

“In the second half, the CBRC will urge banks to consistently implement regulatory requirements,” according to the e-mailed statement.

The regulator’s efforts to protect banks from the effects of a possible plunge in property prices have included stress tests, mortgage restrictions and increased capital requirements. Liu Mingkang, head of the regulator, told China Central Television last month that the nation’s banks can withstand as much as a 50 percent drop in property prices.

China’s home prices rose at the slowest pace in 11 months in July, according to SouFun Holdings Ltd., operator of the nation’s biggest property website. The State Council, China’s cabinet, said last month it will expand measures aimed at curbing home prices to smaller cities after limiting purchases in the largest urban areas including Beijing and Shanghai.

Price Gains

Last year, property prices in China’s 70 biggest cities rose by more than 9 percent for nine consecutive months, according to government data. The peak increase was in May 2010, when prices gained 12.8 percent from a year earlier.

The banking regulator told lenders that land auction failures in the first half, falling home prices in some cities and funding difficulties for smaller developers were among signs that property curbs were taking effect, the person said.

China failed to sell 353 parcels of land at auction in the first seven months of this year, 242 percent more than the same period a year earlier, the Beijing Times reported on Aug. 3, citing Beijing Homelink Real Estate Co.

Twenty six out of China’s 70 biggest cities tracked by the National Bureau of Statistics reported either a decline or no change in home prices in June as compared with May, six more than the previous month, according to the bureau. Data also showed that price gains slowed in 24 cities.

Commercial Property

Banks were told to be particularly alert to risks in commercial properties, where the regulator said speculative funds are increasingly flowing because of curbs in the residential market, according to the person. A 75.5 percent surge in developers’ funding from overseas in the first half was also seen by the regulator as evidence of hot money entering the property market, the person said.

“Overall monetary tightening may ease if the external environment continues worsening, but restrictions on the property market are unlikely to relax in the near term,” Minzu Securities’s Cui said. “Property curbs have yet to see obvious effects and they need to be enhanced and deepened.”

Concerns the global economy may be faltering and Standard & Poor’s downgrade of the U.S.’s credit rating have contributed to a more than 4 percent drop in China’s benchmark Shanghai Composite Index this month. Hong Kong’s Hang Seng Index (HSI), the Standard & Poor’s 500 Index and the MSCI World (MXWO) Index have all fallen by more than 9 percent in the same period.

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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