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2 China casts fearful eye at
subprime By Niu Zhijing and
Zhou Jiangong
SHANGHAI - In the wake of
the US subprime crisis, China's central bank and
its banking watchdogs have ordered commercial
banks to tighten loans to home buyers and property
developers, apparently in fear that a possible
downturn of the currently bullish housing market
would bring about similar financial turmoil in the
country.
And in a move to further tighten
bank lending to help cool down the economy in
general, the central bank on Saturday raised the
proportion of deposits that
commercial banks must hold in reserve by another
half percentage point. This is the eighth time the
central bank raises the deposit reserve rate this
year.
The latest increase of the deposit
reserve ratio, which will take effect on October
25, brings the ratio for commercial banks to 13% -
matching the record rate that was in effect from
September 1988 to March 1998.
The
credit-tightening moves are also seen as a new
effort to help cool down the housing market. But
considering all the other measures the government
has taken so far, whether the latest will prove
effective is doubtful. Analysts say housing prices
are unlikely to go down soon as demand still far
exceeds supply.
At the end of last month,
just before the October 1 National Day golden-week
holiday, the People's Bank of China (PBoC), the
country's central bank, and the China Banking
Regulatory Commission (CBRC) jointly issued new
regulations requiring commercial banks to raise
their threshold for loans to home buyers and
property developers.
According to the new
regulation, the minimum down-payment required for
mortgage loans to first home buyers must be no
less than 20% of the total price of the premises
for housing smaller than 90 square meters and no
less than 30% for those bigger than 90 square
meters.
To qualify for mortgage loans,
second home buyers are required to make at least a
40% down payment. And they will also have to pay
higher interest rates. For them, the interest rate
should not be lower than 1.1 times the benchmark
lending rate. The current five-year benchmark
lending rate is 7.83%.
And commercial
banks are required to examine the repayment
capability of potential loan borrowers. For the
first time, the regulations specifically stipulate
that monthly installments on a mortgage loan must
not exceed 50% of the monthly income of a
borrower.
Over past two years, as the
housing market has heated up, commercial banks
have been competing to offer mortgage loans,
seeing this as a profitable and relatively safe
business. In some cities, some banks have only
required a 10% down-payment without examining the
repayment capability of borrowers. Thus, risk is
increasing as housing prices rise.
In
fact, according to a report by the China
Construction Bank (CCB), total non-performing
mortgage loans in three major state-owned
commercial banks - CCB, the Industrial and
Commercial Bank of China (ICBC), and Bank of China
(BOC) - rose to 19.2 billion yuan (US$2.55
billion) at the end of 2006 from 18.4 billion yuan
in 2005, up 4.4%.
The report warned that
China's commercial banks were entering a high-risk
period in terms of defaults on housing mortgage
loans, as the central bank has been raising
interest rates frequently and monthly installments
for mortgage loans continue to rise as housing
prices keep rising.
Aware of the looming
risk, CCB, had already raised its thresholds for
housing loans. In Shanghai it now requires 50%
down-payment for second home buyers.
To
justify the new regulations, the joint statement
by PBoC and CBRC also said, "It is clear that the
rapid rise in real estate prices is due to
irrational factors and that market risks for
commercial lenders are increasing."
The
new regulations, if observed to the letter, will
put commercial banks in a safer position to grant
mortgage loans, analysts say. Only when housing
prices drop 20% to 30% will some mortgage loans
become non-performing.
In practice, the
new policy is also aimed at helping tame the hot
property market. But analysts say its
effectiveness remains to be seen, since China's
housing market is still largely dictated by
shortage of supply.
For example, Shanghai,
the bellwether of China's soaring real estate
market, is seeing the stock of its new housing go
down to below 6 million square meters, the lowest
in more than two years. The minimum stock of
housing at any time that can meet demand in
China's biggest commercial metropolis is 10
million square meters. The new signs of supply
shortage could add more upward pressure on house
prices.
After the National Day holiday, an
increasing number of first time
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