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12 Mar 2014
Flash: China's bank regulator warns of property market risk - Nomura
FXStreet (Bali) - Nomura Economist Zhiwei Zhang sent a note to clients summarizing the latest warning against China's property market, this time coming from a banking supervision official in China.
Key Quotes
"According to the Chinese-language newspaper Economic Information Daily today, the head of Jiangsu provincial banking supervision bureau, Yu Xuejun, warned against risks in the property market and the spillover effect of such risks to local government financing vehicles (LGFVs)."
"He said that these will be key risk areas on which the regulatory authorities need to be vigilant in 2014 and for the next one to three years down the road."
"He believes that the boom in the property sector may be close to its end. He expects “more significant divergence among property markets of different cities – a small number of cities may maintain relatively high property price, but property bubbles in third- and fourth-tier cities cannot sustain”. "
"He also expects that “credit defaults will definitely happen – it‟s just a matter of timing, scale, and how big the impact is”. He points out that it is the land finance (i.e. local governments selling land and utilizing land as collateral to borrow) that is supporting the LGFVs‟ operations."
"He said that, once the cash flows of many small property developers, especially in third- and fourth-tier cities, become problematic, risks will emerge. This is because when property developers cannot complete their projects, it will affect government land sales, and in turn, will turn LGFV debt into a problem. In addition, property developers‟ cash flow problems may incur sizable credit risks in terms of bank loans and trust products."
"We fully agree with Mr Yu‟s assessment. We continue to view the property sector overinvestment as the top risk for China's economy for 2014 and 2015. The slowdown of the urbanisation process exacerbates this risk."
Key Quotes
"According to the Chinese-language newspaper Economic Information Daily today, the head of Jiangsu provincial banking supervision bureau, Yu Xuejun, warned against risks in the property market and the spillover effect of such risks to local government financing vehicles (LGFVs)."
"He said that these will be key risk areas on which the regulatory authorities need to be vigilant in 2014 and for the next one to three years down the road."
"He believes that the boom in the property sector may be close to its end. He expects “more significant divergence among property markets of different cities – a small number of cities may maintain relatively high property price, but property bubbles in third- and fourth-tier cities cannot sustain”. "
"He also expects that “credit defaults will definitely happen – it‟s just a matter of timing, scale, and how big the impact is”. He points out that it is the land finance (i.e. local governments selling land and utilizing land as collateral to borrow) that is supporting the LGFVs‟ operations."
"He said that, once the cash flows of many small property developers, especially in third- and fourth-tier cities, become problematic, risks will emerge. This is because when property developers cannot complete their projects, it will affect government land sales, and in turn, will turn LGFV debt into a problem. In addition, property developers‟ cash flow problems may incur sizable credit risks in terms of bank loans and trust products."
"We fully agree with Mr Yu‟s assessment. We continue to view the property sector overinvestment as the top risk for China's economy for 2014 and 2015. The slowdown of the urbanisation process exacerbates this risk."