China property controls seen in Ping An Bank shift; Local Gov’ts Begin to Face Fiscal Crunch; Chinese Banks’ Bad Loan Ratio to Hit 3Pct in 2013: S&P Report; More Chinese cities ready for property tax pilots

China property controls seen in Ping An Bank shift

2013-02-27 09:29:24 GMT2013-02-27 17:29:24(Beijing Time)  SINA.com

A move by China’s Ping An Bank (000001.SZ) to ban its regional branches from approving mortgages may signal that Beijing is set to tighten controls on the property market to calm record prices, market sources said on Wednesday.

Rising house prices, which have pushed home affordability rates to all-time lows, have fanned speculation China will expand a three-year campaign to cool the property market by cracking down harder on investment or speculative purchases.

Ping An’s decision to have its headquarters take charge of home loans is likely a signal from the mid-sized lender that it anticipates a tougher policy line from the central government and is preparing to toe it, rather than a shift in strategy to better manage risks, said an analyst at ratings agency Fitch.

“I don’t think this is related to risk management or rising credit risks. I think this is more related to macroeconomic policies,” added the analyst, who declined to be identified because she was not authorized to speak to media in mainland China.

For now, bankers say Beijing has not further tightened controls and mortgage lending is proceeding as before. They regard Ping An Bank’s move as pre-emptive and unlikely to be followed unless forced to by Beijing as home loans are typically the safest assets in Chinese bank ledgers.

“There has been talk of possible tightening in mortgage lending, but we’ve received no notice from the headquarters to change current practices,” said a loan officer at a branch of one of China’s four biggest banks.

A second banker from another of China’s major banks also said his bank had yet to change its mortgage lending practices.

Ping An Bank, majority-owned by Ping An Insurance (2318.HK), the world’s second-largest life insurer by market value, said on Tuesday it had barred all its branches from approving home loans and that it has reduced mortgage lending in “recent years”.

“Our head office has asked branches to hand over the right to examine and approve mortgage loans recently and all mortgage cases will be handled by the headquarters,” Ping An said in an email reply to Reuters.

“The head office will prioritize loans for home occupiers while restricting speculative purchases of homes. With regards to traditional home loans, an area of business more subjected to policy tightening, our bank has consciously scaled back.”

To support first-home buyers, Ping An said they get a 15 percent discount on benchmark interest rates for mortgages. Second-home buyers, on the other hand, are charged mortgage rates 1.1 times that of benchmark levels, Ping An said.

SAFEST LOANS

Ping An’s move to increase control over mortgages came a week after China’s cabinet restated its intentions to expand a pilot property tax program to more cities as it urged local governments again to control prices of new homes.

Despite mounting concerns over China’s record house prices, a source of discontent for ordinary Chinese and a concern for stability-obsessed Beijing, analysts and bankers have long argued mortgages are banks’ best and safest assets.

High downpayment rates for buyers that reduce the amount of debt involved in home purchases have helped to keep delinquency rates on mortgage loans low, analysts say.

Industrial and Commercial Bank of China (601398.SS), China’s biggest bank by assets, for instance, reported a non-performing ratio of 0.9 percent for property loans in 2011, below an average 1.2 percent for all its loans.

China’s bank regulator too recognizes that home loans are the least of banks’ problems when it comes to credit risks.

Mortgages have a risk weighting of 50 percent when banks calculate their capital adequacy ratios, compared to 100 percent for corporate loans.

“Mortgage loans should always be the safest assets for banks,” the Fitch analyst said.

02.27.2013 17:09

Local Gov’ts Begin to Face Fiscal Crunch

Spending on improving living standards comes as tax revenues dwindle, meaning many provinces and regions are having trouble balancing budgets

By staff reporter Yu Hairong

(Beijing) – The country’s economy may be on track for a recovery this year, but the fiscal pressure on most local governments has not been relieved.

They face an array of challenges. On the revenue front, tax income is likely to fall because of structural changes to the taxation system, including changing the business tax to a value-added tax and eliminating unreasonable fee charges. Also, uncertainties remain as to how much real estate development can contribute to fiscal revenues.

On the other hand, demand for expenditures keeps rising because of enhanced commitment to education, health care and social security, among other initiatives.

The pressure has been apparent for a long time. Some local governments did not even meet their fiscal revenue goals last year.

The government of Inner Mongolia collected only 249.7 billion yuan in fiscal revenue in 2012, almost 18 billion yuan short of the target it set at the beginning of the year. It attributed the shortfall to a slowdown in the overall economy and, in particular, to lower prices of resources such as coal. Profits from provincial state-owned enterprises also fell significantly, its budget report said.

The governments of Dalian, in Liaoning Province, and Beijing fell short of their budget targets as well. Dalian missed its goal by nearly 2 billion yuan as tax income grew much more slowly than expected. So did Beijing, where business, personal income and deed taxes all fell short of targets.

Housing regulations continued to influence local governments’ income by reducing their land sales revenue. Jilin Province, for example, saw its land sales revenue last year fall by 21.9 percent year on year.

While income dwindles, required spending is on the rise. Last year, to meet the central government’s goal of raising education expenditure to 4 percent of GDP, most provinces had to increase their outlays by at least 20 percent from 2011. This exceeded the growth rate of their fiscal revenue over the same period.

In its work report, the Yunnan government said the difficulty balancing the budget in 2012 was unmatched in recent years. The pressure came mostly from increased spending on economy-stimulating projects and social welfare schemes, and repayment for municipal government bonds issued in 2009 as well as money borrowed to build highways, the government said.

A number of other provincial governments had the same problem, including Hainan, Hunan, Shaanxi and Zhejiang. Indeed, many provinces had to spend as much as 60 percent of their public expenditure on fields directly associated with improving people’s living standards.

Beijing said it had little leeway in terms of maneuvering public finance because more than 80 percent of expenditure has been earmarked for specific projects that are considered fundamental and cannot be changed.

The Hunan government said that the growth of required expenditures had far outpaced that of income, which may come under further pressure if a pilot program that replaced a business tax with a value-added tax is expanded to the central province.

Zhejiang said it is facing acute conflicts between spending and income this year because the real economy remains weak despite a modest recovery. In addition, it is difficult to forecast the housing market’s contribution to fiscal revenue this year, given the continued policy restriction on housing purchases.

Shaanxi said its tax income is overly dependent on the energy and mineral resources sectors, which are vulnerable to economic slowdown. Meanwhile, it is financially strained in face of an ever widening pool of projects that need to be financed by government revenue.

A Severe Problem

Adding to the conflict between income and expenditure is the fact that a great amount of debts tied to local governments have started coming due since 2012.

Ningxia was one of the few provinces the Ministry of Finance helped by issuing bonds to the public. It raised 3 billion yuan through the bonds with a three-year maturity at an annual interest rate of 1.7 percent. In 2012, it needed to pay investors a total of 3.05 billion yuan. By the end of 2012, the government said, it had paid off all the debts.

Though there has been no default by a local government on its debt, provinces and regions including Inner Mongolia, Jilin, Shanxi and Yunnan have said in their budget reports that they are facing mounting pressure over repaying debts, including those incurred from bond issuance through the finance ministry.

The National Audit Office estimates that a total of 1.2 trillion yuan of debts tied to local governments need to be repaid this year. Of that, 799 billion yuan are direct government liabilities, meaning that they must be repaid with fiscal revenue.

Some local governments have established a mechanism to ensure their debts are repaid. Sichuan has created a reserve fund and an information system that the provincial government says covers liabilities and repayment conditions at all levels of administration in the province.

The provincial government said its debt ratio in recent few years averaged 76 percent, below the international alert level of 100 percent.

The Yunnan government said it would replenish the reserve fund for debt repayment and improve the system for lower governments to report on their debts. Shanghai said it would arrange repayment capital based on a thorough and comprehensive review of local government debts.

Liu Ligang, chief economist at ANZ Bank, said that by the end of last year the stock of local government financing platforms’ bonds had increased more than tenfold since 2008. The surge means that the problem of local government debt is more severe than originally thought, he said.

Those bonds are coming under stricter scrutiny this year because four central government departments jointly issued a policy last year that tightened regulations on platforms’ financing activities.

All local governments have vowed to strengthen their monitoring of debt levels. Chongqing said it would create a comprehensive information system that monitors and controls local district and county governments’ debt levels.

Yunnan said it would prevent all platforms and enterprises backed by local governments from raising money through illegal means or guaranteeing others’ debts inappropriately.

Chinese Banks’ Bad Loan Ratio to Hit 3Pct in 2013: S&P Report

02-27 14:37 Caijing

S&P predicted the average return on assets in Chinese banks will fall to 0.9-1.0 percent in 2013 due to rising credit losses and falling net interest margins.

Rating agency Standard & Poor’s warned Tuesday Chinese banks will suffer declining loan quality and profitability in 2013, with non-performing loan ratio to hit around 3 percent by the end of the year.

Anaemic export growth, onerous debt levels in local financing vehicles as well as excess production capacity are holding down banks’ performance, the S&P said in its China Banking Outlook.

Meanwhile, S&P believes the Chinese government will continue clamping down local government’s financing vehicles to avoid a surge in bad loans. The quality of such loans, therefore, may have relatively smaller chances of substantial deterioration.

But credit risks from these loans have yet to be sufficiently addressed and are still rising as additional debts are needed to complete the projects financed by those local debts.

Chinese banks had a total of 9.2 trillion yuan of outstanding loans to local government financing vehicles on their books at the end of last year, accounting for 13.8 percent of total, Shang Fulin, Chairman of the China Banking Regulatory Commission, told an annual regulatory meeting last month.

With limited capabilities to get new financing, pressures on the local platforms could be channeled into the banking system, the CBRC warned.

Chinese banks will also find their businesses less profitable in 2013, largely due to rising credit losses and falling net interest margins, according to S&P. The average return on assets in 2012 is expected to fall to 1.1 percent from 1.2 percent in 2011, the agency predicted, while in the 2013 the ratio could be dropped to 0.9 percent to 1 percent.

S&P highlighted a real downside risk of underestimating credit risks and the resulting unexpected losses. For example, it said, banks will take a glancing blow from shadow banking where they usually play a part as distributors of wealth management products, or intermediaries of entrusted loans, when financiers suffer from mass defaults.

Despite the risks, the rating agency gave Chinese banks a “stable” outlook, citing stabilizing domestic economy, and policy easing expectations.

More Chinese cities ready for property tax pilots

Updated: 2013-02-27 14:26

( Xinhua)

BEIJING – Several Chinese cities are “technically ready” to join the property tax pilots currently in place in Shanghai and Chongqing after thegovernment signalled it will expand the program to more areas, according to a media report on Wednesday.

Wuhan, Hangzhou and Xiangtan possess the basic prerequisites for the launching of such pilots, including a tax evaluation system, the EconomicInformation Daily reported.

Earlier this month, the State Council, China’s cabinet, pledged to strictly implement and improve tightening measures on the housing market inlight of faster-than-expected price rises in some cities.

One of the control directions it named was the expansion of experimental property tax reforms, which analysts said will mainly target some well-prepared cities.

But the Economic Information Daily said the final expansion list is still subject to decisions from the State Council and other related authorities.

As part of China’s efforts to cool its property market amid growing growing public complaints over runaway housing prices, China introduced thetrial imposition of property taxes in 2010.

The Chongqing trial focused on taxing high-end housing while Shanghai’s mainly targeted ownership of multiple houses.

Some experts said that, due to limited scope, the taxes imposed in the two places have not played a significant role in keeping local house pricesin check.

But Nie Meisheng, president of the China Real Estate Chamber of Commerce, said the imposition of property taxes, besides being a signal toguide market expectation, should be seen as a long-term tool to regulate the market, according to the Economic Information Daily.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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