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Cautious China banks could undermine Beijing's property stimulus efforts

Farmers plant rice seedlings in a field near a residential compound in Shaxi township, Guangdong province March 29, 2015. REUTERS/Stringer

By Engen Tham SHANGHAI (Reuters) - As stock market investors cheer Beijing's latest bid to boost the country's ailing housing sector, Chinese bankers are gritting their teeth over the risks they face in further relaxing lending rules to home buyers. Alarmed by persistent weakness in the property market and its increasing drag on the economy, policymakers said on Monday they were cutting downpayments levels for the second time in six months and offering bigger tax breaks. The hope is that by allowing buyers to get mortgages more easily, China can revive the housing market, which accounts for 15 percent of its economy, and where prices are falling at a record pace. But for bankers who are in charge of passing on the policy discounts, the gains for home buyers are in some ways being made at their expense. "The difficulty for us now is that the deposit has gone down, which increases the risks for us," said a loan officer at one of China's four biggest banks. "It's a question of leverage." "We won’t lend if someone isn’t credit worthy – there is a lot of backup due diligence we do these days – and it’s got stricter," the banker said. Bankers at two other firms said they, too, will toe the policy line and reduce downpayment levels for second-home buyers, but that is about as far as they will go, and mortgage rates are unlikely to be lowered. "We’re already losing money at a 70 percent downpayment level", said a banker at a mid-sized Chinese bank. "We’re unlikely to reduce the lending rate." China's biggest banks recently reported lower profits and a spike in bad loans to multi-year highs at the economy slows, adding to their concerns about increasing their exposure to weaker areas of the economy such as the property market. A massive glut of unsold homes could also offset higher sales, keeping prices and fresh investment under pressure. "Whether the current measures are able to support the property market remains uncertain. Nevertheless, it is getting clearer that (economic) growth has again topped policymakers’ minds," economists at OCBC said in a research note, adding it sees increasing chances for more interest rate cuts and other easing measures in the second quarter of the year. For share investors, however, easier lending policies for home buyers are welcome news nonetheless. China stocks <.CSI300> hit fresh seven-year highs on Tuesday morning, helped by rises in property and banking stocks. China markets have rallied 16 percent so far this year, on top of a 50 percent surge in 2014, fueled largely by expectations of more economic stimulus measures. (Reporting by Koh Gui Qing; Editing by Kim Coghill)