28 percent when compared with the previous month, 98 percent of personal mortgage loans is currently lower and a decrease of 27 percent when compared with the than 80 percent. The average debt repayment to income he period the previous year. The area of the land on ratio for mortgage loans is 33 percent, and the average the market was 85.55 million square meters, down 28 collateral ratio for development loans has reached 189 percent when compared with the previous month and percent. In addition, the non-performing loan ratio for by 29 percent when compared with the same period the real estate loans issued by banks, including rural credit institutions, is below 2 percent, and may be trending downward in many regions. 12 With the real estate market depressed, the financial status of real estate enterprises may be of concern Some insiders in the banking industry have pointed out Based on the reports released by various listed real that there are various types of loans that have not been estate companies, by the end of the third quarter 2011, issued as real estate loans, but ultimately have flowed operating cash flows were negative for 70 percent of to the real estate market through various channels, and ch enterprises; more than 40 percent of them saw net there are other loans that use real estate as collateral profits drop or even registered losses, and more thar The total amount of nominal and actual real estate. 80 percent saw debt levels increase when compared related loans is conservatively estimated at more than with the same period the previous year. o With capital 20 trillion yuan. 3 At the same time, the real estate markets tightening daily, many small and medium real industry impacts upstream and downstream industry estate enterprises have assigned equity and creditor's hains. If the real estate market remains depressed dt rights, and dumped tangible assets such as real estate to the lack of demand and decline in producer price and projects in construction, to survive. According to index, the profits of 42 related industries will be affected the Centaline China Property Research Center, from considerably. These industries include iron and steel lanuary to the first half of december in 2011, the equity concrete, electrolytic aluminum, glass, lime, construction trading markets saw a total of 491 real estate industry machinery, building materials, household appliances equity and asset transactions (not including related-party furniture, and automobiles. 14 In this, banks will face transactions)that involved a cash amount of over 130 not only a rise in the rate of bad accounts from real n on Land mar- billion yuan. Property right transactions from enterprises estate loans, but also an increase in loan default risks for et Transactions in 300 real estate as the main business accounted for 253 transactions, which was approximately double the 2012,http://fdc.soufun.com number of horizontal mergers and acquisitions for the Looking forward to 2012, relaxation of real estate entire year of 2011; the cash amount for mergers and regulation and control policies is unlikely. The number 1o Moneyweek,"Sensi- tive Real Estate: Capita acquisitions exceeded 90 billion yuan. of loans designated as real estate will slow in growth Although real estate prices may drop by 10 to 15 rol of Fate". Janua In 2012, banks may face higher levels of default for percent, the intermediate business revenue of banks is 2012,http cn/house/2012/01/ loans in real estate and related industries. In the past few very high; many banks have a profit level of 50 to 100 09073912000685 shtml ears, the Cbrc has conducted several rounds of stress percent. Even if falling real estate prices incur some tests on real estate loans The Commission found that sses, it may not have much of an impact on the overall the breadth and depth of real estate risks are further earnings of banks. However, we still need to note that expanding, but that the supervisory and regulatory falling real estate prices will increase risks regarding authorities believe these risks to be controllable for a the quality of commercial bank assets, leading to umber of reasons. First, the proportion of real estate increased default risks for loans in real estate and related credit loan assets in Chinas banking system is relatively dustries Falling real estate prices will also affect land Liu Mingkang, china Bank- low, and among all loans, the proportion is below 20 and related industries, and therefore the quality of other ing Regulatory Commission, percent. Second, China has maintained effective control commercial and local financing platform loans. It is our ctober 19. 2011. CEO Organization Summit f real estate financial derivatives in the banking industry, hope that, as the major financing channel for the real the volume of securitized products is extremely limited, estate industry, the banking industry can actively grasp 1 China Business News, other innovations such as the ratio of collective trusts the macro-trend in the real estate market, and respond Real Estate Loan Stress Test over the balance of real estate loans is only around 4 cautiously to real estate credit risks. percent, and the risk characteristics are relatively simple May Reach 10 Trillion Yuan" Third, from the perspective of the specific structure of 1 Xun Yugen, "Real Estate real estate loans, the loan to house price ratio for about urns Out in Full force securities Market Weekly, December 3. 2011. 2012 China Banking Industry Top Ten Trends and Outlook--Enhancing Capital Management, Meeting New Challenges2012 China Banking Industry Top Ten Trends and Outlook—Enhancing Capital Management, Meeting New Challenges 5 28 percent when compared with the previous month, and a decrease of 27 percent when compared with the same period the previous year. The area of the land on the market was 85.55 million square meters, down 28 percent when compared with the previous month and by 29 percent when compared with the same period the previous year.9 With the real estate market depressed, the financial status of real estate enterprises may be of concern. Based on the reports released by various listed real estate companies, by the end of the third quarter 2011, operating cash flows were negative for 70 percent of such enterprises; more than 40 percent of them saw net profits drop or even registered losses, and more than 80 percent saw debt levels increase when compared with the same period the previous year.10 With capital markets tightening daily, many small and medium real estate enterprises have assigned equity and creditor’s rights, and dumped tangible assets such as real estate and projects in construction, to survive. According to the Centaline China Property Research Center, from January to the first half of December in 2011, the equity trading markets saw a total of 491 real estate industry equity and asset transactions (not including related-party transactions) that involved a cash amount of over 130 billion yuan. Property right transactions from enterprises with real estate as the main business accounted for 253 transactions, which was approximately double the number of horizontal mergers and acquisitions for the entire year of 2011; the cash amount for mergers and acquisitions exceeded 90 billion yuan.11 In 2012, banks may face higher levels of default for loans in real estate and related industries. In the past few years, the CBRC has conducted several rounds of stress tests on real estate loans. The Commission found that the breadth and depth of real estate risks are further expanding, but that the supervisory and regulatory authorities believe these risks to be controllable for a number of reasons. First, the proportion of real estate credit loan assets in China’s banking system is relatively low, and among all loans, the proportion is below 20 percent. Second, China has maintained effective control of real estate financial derivatives in the banking industry, the volume of securitized products is extremely limited, other innovations such as the ratio of collective trusts over the balance of real estate loans is only around 4 percent, and the risk characteristics are relatively simple. Third, from the perspective of the specific structure of real estate loans, the loan to house price ratio for about 98 percent of personal mortgage loans is currently lower than 80 percent. The average debt repayment to income ratio for mortgage loans is 33 percent, and the average collateral ratio for development loans has reached 189 percent. In addition, the non-performing loan ratio for real estate loans issued by banks, including rural credit institutions, is below 2 percent, and may be trending downward in many regions.12 Some insiders in the banking industry have pointed out that there are various types of loans that have not been issued as real estate loans, but ultimately have flowed to the real estate market through various channels, and there are other loans that use real estate as collateral. The total amount of nominal and actual real estate￾related loans is conservatively estimated at more than 20 trillion yuan.13 At the same time, the real estate industry impacts upstream and downstream industry chains. If the real estate market remains depressed due to the lack of demand and decline in producer price index, the profits of 42 related industries will be affected considerably. These industries include iron and steel, concrete, electrolytic aluminum, glass, lime, construction machinery, building materials, household appliances, furniture, and automobiles.14 In this, banks will face not only a rise in the rate of bad accounts from real estate loans, but also an increase in loan default risks for related industries. Looking forward to 2012, relaxation of real estate regulation and control policies is unlikely. The number of loans designated as real estate will slow in growth. Although real estate prices may drop by 10 to 15 percent, the intermediate business revenue of banks is very high; many banks have a profit level of 50 to 100 percent. Even if falling real estate prices incur some losses, it may not have much of an impact on the overall earnings of banks. However, we still need to note that falling real estate prices will increase risks regarding the quality of commercial bank assets, leading to increased default risks for loans in real estate and related industries. Falling real estate prices will also affect land and related industries, and therefore the quality of other commercial and local financing platform loans. It is our hope that, as the major financing channel for the real estate industry, the banking industry can actively grasp the macro-trend in the real estate market, and respond cautiously to real estate credit risks. 9 China Index Academy, “Information on Land Mar￾ket Transactions in 300 Cities across the Country in February 2012”, March 11, 2012, http://fdc.soufun.com/ report/5050.html. 10 Moneyweek, “Sensi￾tive Real Estate: Capital Policy Is the Person in Control of Fate”, January 9, 2012, http://finance.jrj. com.cn/house/2012/01/ 09073912000685.shtml. 11 Guangzhou Daily, “Industry Expects That Non-mainstream Real Estate Enterprises Will Dump Assets”, December 21, 2011, http://www. cs.com.cn/fc/02/201112/ t20111221_3178416.html. 12 Liu Mingkang, China Bank￾ing Regulatory Commission, October 19, 2011, CEO Organization Summit. 13 China Business News, November 14, 2011, “Bank Real Estate Loan Stress Test Has Blind Spots, and Hidden Real Estate-related Loans May Reach 10 Trillion Yuan” 14 Xun Yugen, “Real Estate Turns Out in Full Force”, Securities Market Weekly, December 3, 2011