BEIJING (Dow Jones)--Bank of China Ltd. (3988.HK) ordered an "overall hike" in interest rates on new loans extended to property developers Monday, as part of efforts to curb the size of new loans and lower potential risks in property lending, a person familiar with the situation told Dow Jones Newswires on Tuesday.
The move appears to be in response to the China Banking Regulatory Commission's call last week for lenders to remain vigilant to property-market fluctuations. The regulator has pledged to step up its supervision of property-related loans amid growing concern about the formation of asset bubbles.
Bank of China told its credit officials at a meeting Monday that interest rates on new loans extended to real-estate developers should be raised from Feb. 1, and that "in principle" officials aren't allowed to offer a rate below benchmark interest rates, according to the person, who declined to be named.
During the meeting, management also criticized some teams for lending too much in January, said the person, without elaborating.
An official in Bank of China's news department said he was unaware of the move.
Analysts say the move shows lenders are making progress in curbing loans to property companies, amid concerns over an asset bubble forming in the fast-growing sector, but the impact on property developers will likely be limited in the near term.
Sophie Jiang Li, a banking analyst with CCB International Investment Ltd., said Bank of China's move signals lenders are scrutinizing their lending practices more strictly, which will cause the growth in new loans to stabilize in February from January.
However, she said raising loan rates won't deliver a "mortal blow" to property developers as they have high levels of profitability and multiple fund-raising channels other than bank lending.
State banks' average loan rates to property developers are around 15% higher than benchmark rates, compared with the average 30% premium for other industries, she said.
Johnson Hu, a property analyst at UOB Kay Hian, said smaller property developers with limited liquidity and some bigger companies with relatively higher leverage ratios would be more sensitive to such moves.
Bank of China asked its branches to halt lending in mid-January after an overly rapid expansion in new loans in the first half of last month. A few other banks also slowed lending growth last month.
In a report Monday that cited unnamed sources, the Century Weekly magazine, headed by former editors of the well-regarded Caijing magazine, said new loans had fallen below CNY1.1 trillion as of Jan. 28 from CNY1.45 trillion as of Jan. 19 as banks slowed lending and some bills matured.
China's regulators including the CBRC and the central bank took steps last month to rein in the surge in loans, including hikes in banks' reserve requirement ratio. They called for banks to achieve more balanced lending growth throughout the year to prevent inflationary pressures and curb asset bubbles.
Fan Gang, a key adviser to China's central bank, said Monday asset bubbles are "the real worry" for China's economy and the government should properly manage them, reflecting increasing official concern about rapid real-estate price rises.
