The Mid-autumn Festival ,Pavilion of Prince Teng and the brige across to Yangtze River under the moon at night stock photo
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Ongoing turmoil in China’s property sector is posing a growing risk to the financial system, warns Moody’s Investors Service in a new report.

The rating agency said that risks to the stability of China’s financial system are on the rise, as the real estate sector continues to suffer a downturn, and the economy is weakening.

Moody’s said that it has lowered its GDP forecasts for both 2022 and 2023, citing the weakness in the property sector. The outlook for the sector remains negative, amid weak demand, it noted.

“Some buffers protecting the financial system are eroding, which would pose risks if the property downturn becomes protracted,” Moody’s said.

Overall, the banking system remains strong, the report noted, but smaller banks are more vulnerable.

“While large banks remain well capitalized and can absorb significant losses, smaller banks are much more exposed to continued problems in the property sector,” it said.

The banks’ exposure includes lending to industries in the property sector’s supply chain, collateral devaluation, and declining asset quality due to the broader economic slowdown.

“Although the authorities continue to have tools to prevent a systemic financial crisis, some of these buffers are weakening, and could pose risks if the property downturn endures,” said Lillian Li, vice president and senior credit officer with Moody’s, in a release.

“The changing domestic and external macro environment is contributing to lower policy effectiveness; the government’s capacity to provide support has become more constrained; and while financial stability remains a top priority, the authorities have become more selective in their willingness to provide support,” Li added.