Chinese financial regulators have imposed new rules restricting lending to property developers in an attempt to mitigate potential risks from the sector to the country’s financial system.

New regulations brought in on 1 January mean state-owned banks must limit their loan exposure to the property sector to 40% or less, Bloomberg reports. Furthermore, mortgage lending must not exceed 32.5% of the loan book of all banks.

It is the first time regulators have imposed such limits on lending to the sector.

The regulations were brought in to try and cool China’s housing market and reduce leverage among developers. Chinese regulators have for several years worried that leverage among real estate firms could pose a risk to the country’s entire financial sector — in 2015, China enacted rules prohibiting overseas property acquisitions without government approval. Almost overnight, outbound investment by previously acquisitive Chinese firms plummeted dramatically.

Banks have been extending an ever-greater share of their capital to developers, in spite of perceived risks, to profit from the rising prices in the sector, Bloomberg said.

At the beginning of 2020, Chinese financial authorities asked 12 of the country's largest developers, including China Vanke and China Evergrande, to report their debt levels on a monthly basis. An index of Shanghai-listed property developers fell 2.3% on Monday following the imposition of the regulations.

In spite of efforts to dampen the sector, Chinese residential property prices have risen every month since November 2015.