UPDATE 1-China central bank says to cap property loans by banks

* PBOC asks banks to cap outstanding property loans, mortgages

* New rules came as policymakers shift focus back to debt risks

* China’s growth has almost recovered to pre-COVID levels

* Aims to help banks withstand property market volatility (Adds detail, background)

BEIJING, Dec 31 (Reuters) - China’s central bank issued a regulation on Thursday to cap property loans by banks, as authorities shift their attention back to debt risks and look to guard against any overlending to the property sector.

The People’s Bank of China (PBOC) said each bank’s outstanding property loans as a proportion of total loans, as well as its ratio of outstanding mortgages to total loans, should both be capped as required.

The establishment of the so-called collective management system for real estate loans will enhance lenders’ ability to withstand fluctuations in the real estate market and prevent systemic financial risks caused by over-reliance on real estate loans in the financial system, the PBOC said.

With China’s economy nearly fully recovered to pre-coronavirus levels, policymakers have been turning their attention back to financial risks after record bank lending this year. But analysts believe China’s overall credit growth will ease but only slightly in the near term as caution remains over the global economic outlook.

The government had for years taken measures to restrict credit to the real estate sector to contain financial risks. Nearly 30% of outstanding loans with China’s financial institutions were property loans by the end of September, according to PBOC data.

For China’s big four banks, along with China Development Bank, Bank of Communications and Postal Savings Bank of China, the ratio of outstanding property loans to total loans will be capped at 40% and their outstanding mortgages as a proportion of total loans, will be capped at 32.5%.

For smaller banks, requirements vary. The PBOC said the requirements could be adjusted upward or downward by 2.5 percentage points depending on the region’s economic performance.

Banks that do not meet the requirements would be granted a grace period. If they missed the requirements by less than 2 percentage points, they would be granted a grace period of two years. If more than 2 percentage points, the grace period would be four years.

The new rules will take effect from Jan. 1. (Reporting by Stella Qiu, Zoey Zhang, Cheng Leng and Ryan Woo; Editing by Clarence Fernandez, Robert Birsel)