The risk of the Chinese ecnomy going into a tailspin has increased, with the country's realty sector facing a crisis due to extreme borrowings by construction contractors, reported Channel News Asia.
Quoting a report by rating agency Moody's on December 2, the report said the country's small banks have been rendered more vulnerable in the light of the realty slowdown.
Further, according to the report, the realty sector slowdown has led to a reduction in property investments, property prices, sales and ultimately a huge number of bond defaults.
Further, quoting the Moody's report, Channel News Asia reported, "Some buffers protecting the financial system are eroding, which would pose risks if the property downturn becomes protracted".
Beijing has intervened to increase liquidity for small lenders, as the Chinese realty sector has contributed significantly to the country's wealth and growth.
As part of its efforts to arrest the slowdown in the key sector, China's biggest commercial banks have arranged USD 162 billion as fresh credit to property developers, according to Channel News Asia.
The Moody's report also mentions that the government's new efforts could ease up funding constraints but these will take time to take effect.
The exposure of Chinese banks to the property market is rather limited, the Mody's said, adding that the slowdown will affect the property market in indirect ways. These include lending services to the property industry and the supply chain of the property industry, which could ultimately result in collateral devaluation against borrowings, the report further said.
The risks of high non-performing ratios of the property market are expected to stay high in the coming months, Channel News Asia reported quoting property sector analysts.
China's real estate industry accounts for about 30 per cent of the country's economy. The inability of ailing property developers to convince people to keep up with their mortgages points has led to a severe decline in one of China's key growth drivers, the report said.
Owing to deep recession in China's realty market, the inability of ailing property developers to convince homebuyers had opened up new cracks in the country's financial system, setting off fresh worries in Beijing and beyond, Channel News Asia reported.