Chinese banks face risk from surging bad loans in real estate

Nonperforming loans in property may hit 1.5% in 2018.

Bloomberg reports that Chinese banks face heightened property risk as soured loans in the real estate sector are piling up with the sector’s nonperforming loan ratio expected to hit 1.5% in 2018, according to China Orient Asset Management Co.

“If home prices fall 20 percent to 30 percent, reacting excessively to the relentless policies... industry risks will burst out one by one,” according to the survey report. “That would break the risk cushion of banks.”

The banking sector’s total bad loans surged from $272.7b in March to $292.55b as of end-May, according to central bank data. The non performing loan ratio also increased by 15 basis points from 1.75% in March to 1.9% in May despite holding steady in the past year.

Although China Orient Asset Management Co. reveals that bad loan ratio in the property sector remains low for now, overall levels are slowly approaching the economy’s average of 1.75% and have been picking up pace since 2013 even as Beijing intensifies its campaign to deleverage the bloated property industry.

Also read: Are smaller banks bearing the brunt of China's bad loan problem?

“Despite the authorities’ deleveraging efforts, overall credit continues to build up within the financial system. As such, Fitch expects asset quality pressures to remain although reduced economic headwinds, if sustained, could lower pressure in the short-term,” said Grace Wu, head of China bank ratings at Fitch said in a video briefing.

Here’s more from Bloomberg: