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Chinese banks' excessive exposure to property is now the "biggest grey rhino risk" facing the stability of the financial system, a top financial regulator has warned.
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Communist Party chief of the People's Bank of China (PBOC), wrote recently steps must be taken to avoid "bubbles" in the real estate sector because "among the 130 financial crises since the start of 20th century, more than 100 of them are related to property markets".
His article is included in a newly released book from the central government explaining the country's economic priorities and development plan for 2035.
Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.
Guo said property-related loans made up 39 per cent of all bank lending in China, although according to the PBOC property loans, including mortgages and lending to developers, accounted for 28.8 per cent of the total at the end of September.
Using Guo's figures, property-related loans are equal to about two thirds of China's gross domestic product (GDP), but nearly half of GDP if using the central bank data, according to South China Morning Post calculations.
In addition to bank loans, many of China's bonds, equities and trust investment products are also related to property development, which means the overall financial exposure to real estate is dangerously high, Guo noted.
"The property market is now the biggest grey rhino financial risk in China," he said, referring a highly probable risk on which insufficient action has been taken.
The Chinese government has launched numerous measures to rein in property speculation, from restricting mortgage loans for second-home buyers to disqualifying non-local buyers. Most recently, the government has been trying to cool down property investment in Shenzhen where investors are pouring money into new flats on expectations of immediate gains.
Beijing has also been taking steps to fix its broader financial vulnerabilities, from its financial technology giants to troubled small lenders backed by local governments, in preparation for a long-term economic and technology rivalry with the United States.
"If the United States steps up strategic containment and escalates the rivalry, it could disturb global financial markets," Guo wrote.
In general, Guo noted China will put all financial activities under supervision, set higher regulatory requirements on important financial institutions, and prevent risks across markets and countries.
Guo said that technological innovation was creating fresh challenges for financial regulation.
"China is leading the world in terms of mobile payments, online lending and internet insurance sales, and there's no regulations or risk supervision practises [for China] to learn from," Guo wrote.
China will adopt "special and innovative" regulatory approaches for financial technology firms based on "principals of tolerance and prudence" to strike a balance between promoting development and avoiding monopoly, he said, without naming any companies.
Beijing has been scrambling to address risks to its financial system.
Non-performing loans are growing due to the impact of the coronavirus pandemic on the economy, putting many small lenders at risk, including Inner Mongolia-based lender Baoshang Bank which filed for bankruptcy last year.
Meanwhile, new types of financial risks are emerging. Until recently, China tolerated a boom in peer-to-peer lending, resulting in thousands of small-time lenders operating across the country, many of which degenerated into online Ponzi schemes until the entire industry was shut down.
For financial institutions that falter, Beijing will not bail them out, according to Guo.
"Financial institutions must try their best to rescue themselves," he said. "Governments won't intervene if their risk can be solved through the market. The use of public funds must undergo strict conditions and standards."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Communist Party chief of the People's Bank of China (PBOC), wrote recently steps must be taken to avoid "bubbles" in the real estate sector because "among the 130 financial crises since the start of 20th century, more than 100 of them are related to property markets".
His article is included in a newly released book from the central government explaining the country's economic priorities and development plan for 2035.
Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.
Guo said property-related loans made up 39 per cent of all bank lending in China, although according to the PBOC property loans, including mortgages and lending to developers, accounted for 28.8 per cent of the total at the end of September.
Using Guo's figures, property-related loans are equal to about two thirds of China's gross domestic product (GDP), but nearly half of GDP if using the central bank data, according to South China Morning Post calculations.
In addition to bank loans, many of China's bonds, equities and trust investment products are also related to property development, which means the overall financial exposure to real estate is dangerously high, Guo noted.
"The property market is now the biggest grey rhino financial risk in China," he said, referring a highly probable risk on which insufficient action has been taken.
The Chinese government has launched numerous measures to rein in property speculation, from restricting mortgage loans for second-home buyers to disqualifying non-local buyers. Most recently, the government has been trying to cool down property investment in Shenzhen where investors are pouring money into new flats on expectations of immediate gains.
Beijing has also been taking steps to fix its broader financial vulnerabilities, from its financial technology giants to troubled small lenders backed by local governments, in preparation for a long-term economic and technology rivalry with the United States.
"If the United States steps up strategic containment and escalates the rivalry, it could disturb global financial markets," Guo wrote.
In general, Guo noted China will put all financial activities under supervision, set higher regulatory requirements on important financial institutions, and prevent risks across markets and countries.
Guo said that technological innovation was creating fresh challenges for financial regulation.
"China is leading the world in terms of mobile payments, online lending and internet insurance sales, and there's no regulations or risk supervision practises [for China] to learn from," Guo wrote.
China will adopt "special and innovative" regulatory approaches for financial technology firms based on "principals of tolerance and prudence" to strike a balance between promoting development and avoiding monopoly, he said, without naming any companies.
Beijing has been scrambling to address risks to its financial system.
Non-performing loans are growing due to the impact of the coronavirus pandemic on the economy, putting many small lenders at risk, including Inner Mongolia-based lender Baoshang Bank which filed for bankruptcy last year.
Meanwhile, new types of financial risks are emerging. Until recently, China tolerated a boom in peer-to-peer lending, resulting in thousands of small-time lenders operating across the country, many of which degenerated into online Ponzi schemes until the entire industry was shut down.
For financial institutions that falter, Beijing will not bail them out, according to Guo.
"Financial institutions must try their best to rescue themselves," he said. "Governments won't intervene if their risk can be solved through the market. The use of public funds must undergo strict conditions and standards."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.