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Commentary: New loan rules porous
( 2003-08-14 09:20) (China Daily)

It is reasonable for the central bank to impose harsher limits on housing credit for fear of a speculative bubble in the real estate industry. But it should reconsider some of the measures it has introduced, said an article in Shanghai-based Jiefang Daily. An excerpt follows:

The central bank proved its vigilance earlier this year when it chose to minimize financial risks in the real estate industry by regulating housing loans.

In June, it issued a circular asking commercial banks to limit lending to real estate developers, strengthen credit management and increase the down payment thresholds for buyers of second homes and luxury houses.

Banks can reduce the risks involved in housing loans -- one of their best assets -- by making down payments mandatory. But if real estate prices drop dramatically in the future, even a large down payment will not help the bank recover its loan.

Fortunately, the present state of the economy makes such a scenario unlikely.

The ups and downs of real estate prices usually mirror those of the economy, while steep falls in property prices are often preceded by dramatic inflation.

Currently, China's economy is growing strongly despite the SARS outbreak this spring. And the shadow of deflation over China since the 1997 financial crisis is yet to fade.

So there is no reason to worry about a real estate recession in the near future. And the recent growth of investment in property reflects market confidence in the economy.

A tightened policy on housing credit will probably widen the gap between demand and supply in the real estate market and push up prices.

The central bank's determination to curb improper practices and mismanagement of housing loans is understandable. But to realize this goal, many of its regulatory measures should be improved in line with the market situation.

According to the central bank's regulation, loans got from the mortgaged houses in a city are prohibited to be used in other cities. Such ban is seen by the authorities to be effective in eliminating risk.

However, the widespread existence of the banned practice reveals that different regions do differ in their need for capital, which is natural in a market-driven economy.

The authorities should recognize these differences and provide proper guidance for capital flow.

Another example is the central bank's limit on loans for people buying a second house to prevent speculative purchases.

As the economy grows, more people will put their houses up for sale to buy larger and better houses, and demand for rented houses will also increase when people become freer to move between cities. In either case, a second home is needed and the purchase has nothing to do with speculation.

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