China has made the decision to address credit risk amid the country's real estate crisis

Some of China's biggest banks have tightened asset quality controls and interbank lending standards for smaller lenders to curb credit risk amid the country's real estate crisis, Azernews reports citing Reuters.

At least two of the country's largest banks have been conducting inspections over the past few months to determine the quality of smaller lenders' assets and high default risk, it said. The source noted that one of the banks has completely stopped buying bonds issued by small credit institutions with assets of less than 40 billion US dollars.

In addition, China's two state-owned banks have decided to lower interbank credit limits and set shorter terms for such transactions for small banks considered high-risk. We are talking about banks operating in Henan and Nei-Mengu provinces in northeastern China. It should be noted that China's medium and small banks make up about half of the trading volume in the interbank credit market.

The moves come amid growing concerns about the health of China's smaller banks due to a worsening real estate crisis. But this cautious approach can make the situation worse for smaller banks, because they have less ability to lend: big banks use customer deposits as a source of funding for lending, while smaller players borrow from competitors to raise these funds.

Meanwhile, as China grapples with slowing economic growth and its impact on the country's financial system, local authorities have taken measures to support the banking system. First of all, we are talking about small banks in order to maintain financial stability in the country. As part of the support measures, local authorities sold a record amount of special bonds. Funds raised from them were directed to the capital of troubled small regional banks.

About 4,000 smaller banks are not viewed as a systemic risk per se , the source told Reuters : "The concern is that many of them have financed themselves mainly through short-term borrowing in the money market. Therefore, if some of them go bankrupt, this will create a collective threat for the banking sector."