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October 20, 2016

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New stab at property bubble: will it work?

CHINA’S robust housing market is set to face a chill as banks unveil tighter lending policies to fall in line with the government’s latest attempts to rein in surging property prices.

In the past, restrictive policies on lending and home-buying have had mixed results, and economists are now predicting that the new round of tightening may once again show limited benefit.

City commercial banks, including Bank of Bohai and Shanghai Rural Commercial Bank, have started to cease some loans to property developers for land purchases and to more carefully vet individual borrowers who may have “divorced” in the past three months in order to quality as home buyers, according to files seen by Shanghai Daily.

Bigger lenders, such as the Industrial and Commercial Bank of China and China Construction Bank, are set to announce tighter rules on housing loans this week, according to bankers familiar with the issue.

Under new lending policies, developers will be required to pay at least 30 percent down payments on loans for residential projects. That’s up from as low as only 10 percent in the so-called “shadow banking” system, a gray area that operates outside the normal scrutiny of banking regulators.

Mortgage applicants who fail the three-month “divorce” test also face loan rejections. Many couples have gone through contrived divorces in order to qualify to buy homes. Many cities in China have issued regulations to limit house purchases to single people buying their first home and have disqualified married couples from buying second and third homes for investment purposes.

The new rules leave clients who divorced in 2016 anxiously awaiting determinations of their status.

“It’s now a universally accepted fact that easy bank credit has been the main driver of the most recent surge in property prices,” said Zhang Dawei, chief analyst at Centaline Property Agency. “This round of credit tightening will be expanded to more cities as a major measure to cool down the market in a short term.”

He added, “People who have received easy-credit loans often failed to find suitable properties to invest in. Some house hunters reaped big profits from the first round of the housing boom, but the market started going crazy as more investors tried to squeeze into buying.”

Chinese banks recorded 1.22 trillion yuan (US$181 billion) in net new yuan loans in September, with 47 percent of them related to housing mortgages. The percentage of housing loans was slightly below the August reading.

Between 2010 and 2015, by comparison, an average 17.4 percent of new loans went into housing, according to BNP Paribas.

More recently, the scale of mortgage-loan issuance has been growing, despite regulatory warnings about credit risks looming in the property sector.

Chinese banks are also eagerly trying to help property developers find financing through other channels, such as corporate bonds and wealth management products. Those attempts are based on confidence that the government won’t let the property market crash.

Then, too, there is the “shadow banking” system where developers can tap loans. Some developers use online peer-to-peer lending platforms to raise funds to buy raw land parcels, and others tie up with fund companies to package capital raising as trust or insurance products. The government has pledged to clean up that sector, but no major crackdown has yet produced results.

Property companies in China, both state-owned and privately owned, had issued bonds valued at a record 398.8 billion yuan by the end of 2015, more than triple the volume a year earlier. By September of this year, the figure has already touched 340.1 billion yuan, according to data compiled by Bloomberg.

The National Bureau of Statistics reported that property prices in August posted their biggest percentage gain in six years. Home prices in the southern city of Shenzhen, which borders Hong Kong, have risen about 60 percent in the past year alone.

Wang Jianlin, the China billionaire who made his fortune in real estate, warned in a recent interview with CNN that the current property market is the “biggest bubble in history.” He said he doesn’t see “a good solution to this problem,” despite the fact that more than 20 cities have introduced high-profile tightening measures since the end of September.

Many analysts said government curbs on property purchases and credit are unlikely to stall the long-term upward trend of rising property prices in big urban areas. They cite the unending flow of rural migrants and others to China’s biggest cities in pursuit of better education, health care and work opportunities.

Rapid property price increases in the biggest cities merely reflect underlying demand and a housing supply shortage, said Larry Hu, head of China economics at Macquarie Securities. The fundamentals are very different from the kind of credit-fueled property boom-and-bust cycle seen elsewhere. An overhaul of the current system of land sales needs urgent attention.

Prices paid by developers for raw land parcels in cities like Shanghai have been skyrocketing, providing a pot of gold for government and escalating the prices of apartments built on the land. In some cities, land sales account for up to 40 percent of annual government revenue.

Developers have been dubbed “land kings,” with Rongxin (Fujian) Investment Group buying a property parcel in Shanghai’s Jing’an District in August for a record-breaking price of 11.01 billion yuan.


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