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Squeezing property-loan bubble
( 2003-07-05 16:29) (chinadaily.com.cn)

Will the central bank's clamp down on credit for the brisk property market turn out to be a blessing in disguise for everyone?

For the most Chinese homebuyers, the answer might be "Yes" but it seems that domestic banks and real estate developers have not yet come to terms with the ramifications of this about-turn in lending policy.

The People's Bank of China, the country's central bank, issued a circular on June 13 asking commercial banks to limit lending to real estate developers and constructors, strengthen credit management and increase the down-payment requirements for buyers of second homes and luxury houses.

This move could readily be interpreted as the authorities' response to the call by vast numbers of consumers, especially those from medium and low-income families, for affordable homes.

Though the growing numbers of new houses and the country's unprecedented support for personal mortgages aroused people's dream of owning their homes in recent years, rocketing prices have kept the market at arm's length of most Chinese.

The selective contraction of credit outlined in the circular is likely to cool down the overheated property market and coax real estate developers into building more less expensive houses. This is definitely welcome news for numerous potential homebuyers.

Moreover, strict credit controls for developers will only help reduce the purchasing risks for ordinary homebuyers.

However, the central bank's prescription appears hard to swallow for the commercial banks, which have been vying desperately for a bigger slice of the property loan cake.

Property loans in China have grown rapidly amid the continuing boom in the property market. Total outstanding property loans reached 1.8 trillion yuan (US$216 billion) at the end of April, accounting for 17.6 per cent of all commercial bank loans.

It is understandable that commercial banks have thrown all their support behind borrowers from the property market given the amazing trend in that market and the good rate of profitability provided by such loans.

Moreover, under pressure from a yawning gap between bank deposits and loans, commercial banks have no choice but to firmly grasp lucrative property loan business.

A survey by the central bank conducted between July 2001 and September 2002 indicated that 9.8 per cent of the 20,901 spot-checked property loans, involving about a quarter of the total sum, had been granted in violation of the relevant regulations.

This shocking result undoubtedly alerted the banking authorities to the increasing financial risks behind the breakneck expansion of property loans.

Take low-risk housing mortgages, for instance. Outstanding personal mortgages soared from 19 billion yuan (US$2.3 billion) in 1997 to 661.6 billion yuan (US$79.7 billion) in 2002.

The latest statistics from the Industrial and Commercial Bank of China, the country's largest provider of personal mortgages, shows that the bad loans accounted for merely 0.21 per cent of personal mortgages as of the end of May.

That means almost perfect business for the country's commercial banks, especially the big four State-owned ones, which are struggling hard to lower their double-digit bad-loan rate as soon as possible.

Nevertheless, even such a sound performance does not guarantee carefree days for Chinese banks in the future.

Actually, as much as 80 per cent of the current loans were granted within the past two years. International experience implies that the risks of personal mortgages usually surface in three to eight years.

As for the loans that banks competed with each other to provide to property developers and building companies, bitter memories of the bursting of the property market bubble in the early 1990s remained as a stark reminder of the need to implement prudent banking regulations.

Due to improper lending and heavy speculation, today's jaw-droppingly high house prices in big cities such as Beijing and Shanghai are serious enough to cause concern among the authorities about banks' excessive exposure to property-related financial risks.

Some people from the banking sector have challenged the feasibility of the limited credit squeeze, citing difficulties in defining luxury housing and identifying buyers of second homes.

Those doubts are pertinent, considering the complexity of housing prices and the lack of a working national network through which banks can share data on customers.

So far, the central bank has not set specific criteria for this.

While answers to all these questions are still being thrashed out, however, commercial banks have a lot to do to overhaul their internal regulations on granting loans.

In a sense, the punch of the central bank's new rule hinges on the willingness of commercial banks to correct financial irregularities.

Stricter regulations may slow the growth of property loans for the moment, but commercial banks can benefit more in the long run from their vigilance with credit.

Nonetheless, the credit crash may prove too much for some property developers to survive.

Clearly, the central bank's tight rein on credit for the property market has sent chills down the spines of those developers whose projects are heavily funded by bank loans.

It is estimated that loans borrowed from banks by property developers and building companies plus homebuyers' mortgages together accounted for about two-thirds of investment in the property market.

This explains the agony of the developers. Some industrial insiders have even complained that property firms will go bankrupt in great numbers because of the central bank's "high-handed" measure, the strongest blow in a decade.

Property developers bear the brunt of the new rules and can justifiably complain. But the panic that some of them have spread is not reasonable.

In fact, the authorities had already indicated their worries over the looming bubble in the property market since the end of last year.

But the vital importance of the property sector to the national economy has misled some developers to believe that the authorities would not really act.

According to the logic used by some developers, the illegal funnelling of bank credit into the property sector needs to be regulated but regulation constrains this thriving market's ability to fuel the high-speed growth of the national economy - and the country needs rapid growth badly.

It is true that the property sector serves as a key growth engine to the Chinese economy nowadays.

Real estate investment grew a year-on-year 32.9 per cent to 280.1 billion yuan (US$33.7 billion) during the first five months of this year, much faster than the growth in gross domestic product.

But behind the investment frenzy is a rise in vacant housing.

It was reported that, according to experts from the China Real Estate Association, there might be 130 million square metres of vacant housing by April this year, accounting for about 19 per cent of the country's total floor space in private homes.

A sudden slowdown in the property market could be detrimental to the national economy. Yet, it is wrong to bet that the authorities would shy away from taking risks because what is at stake is not only the healthy development of the property sector but also the soundness of the banking system.

The central bank's new credit policy might have caught many property developers unprepared. But it is a needed precaution against property bubbles.

The sustained development of the property sector is in the interests of all sides.

At present, a healthy property market in China can and should only be founded on ample demand from homebuyers as well as prudent banking credit support and an adequate supply of housing that meets the need of the majority of consumers.

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