China’s property slump pushes financial regulator to roll out loan rule ‘trick’ to help grease the economy

China's financial regulator, the National Administration of Financial Regulation (NAFR), has implemented changes to the risk weightings on property sector-related loans for commercial lenders. This move is a strategic attempt to salvage the property sector while simultaneously defusing a looming local government debt crisis. The changes were issued on Wednesday, following the conclusion of the central financial work conference, a bi-decadal event that prioritises risk control and contagion prevention.

The risk weightings are encompassed under capital base rules, which dictate the minimum amount a bank must hold in relation to the risk profile of its lending activities and other assets. In a separate meeting, NAFR director Li Yunze emphasised that serving the real economy was the principal tenet of China's financial sector. He also reiterated that risk prevention and control was the eternal theme, echoing a statement made by President Xi Jinping.

The new rules, set to take effect in January, mandate banks to enhance their credit risk assessments by considering factors such as geopolitical complications, information technology, and climate change. This is in line with China's transition to a hi-tech and green economy. The NAFR anticipates that the average capital adequacy rate of Chinese banks will improve under the new rules, but there may also be marginal changes in the capital adequacy performances of some individual lenders, reflecting the result of differentiated supervision.