The central bank has warned that fluctuations in the real estate
market may threaten banking security.
In its "Financial Stability Report 2006," which was published on
Thursday, the People's Bank of China said the overall performance
of 16 major commercial banks had improved by the end of 2005.
But given the rising house prices and the expanding scale of
mortgages, "the potential risks brought by fluctuations in the real
estate market should be monitored."
The report pointed out that the bad loan ratio of the 16 banks
for individual consumer lending, 90 percent of which is individual
housing loans, was 2.55 percent by the end of last year, 0.75
percentage points higher than a year before.
The report warned that price drops would have an impact on the
macro-economy and the effect will spill over to affect financial
stability. Moreover, it said, the depreciation of house values, as
a result of price falls, will lead to devalued banking assets.
The ratio of individual housing loans to the overall volume of
credit in financial institutions rose from 6 percent in 2000 to 21
percent in 2003. By the end of 2005, the ratio for long-term loans
was 33.9 percent.
Analysts said the central bank is answering the central
leadership's call for more effective macro-economic regulation.
"It sends a clear message that the central bank wants the
commercial banks to do something," said Chen Gong, chief analyst
and chairman of Beijing-based Anbound Consulting.
The Central Economic Work Conference, in which the country's
major economic priorities for next year were mapped out, required
"rational guiding and effective regulation" in the real estate
market.
"The central bank's comment on the real estate market,
therefore, can be seen as a follow-up gesture," said Chen.
But this comment may be more than a gesture, according to Han
Meng, a researcher at the Institute of Economics of the Chinese
Academy of Social Sciences (CASS).
Macro-economic regulation has been in place for many years, but
some problems still remain.
"The central government wants to maintain rational economic
growth, but local governments want to further expand their
investment scale, which pushes up housing prices," said Han.
Despite the macro-economic regulation, the price of new houses
in 70 major cities rose 6.6 percent year-on-year in October. From
January to September, house prices in Beijing rose 10.9 percent
year-on-year.
The warning, released on the day the Central Economic Work
Conference was concluded, may be a well-timed step by policy-makers
to show where they stand on the issue, said Han.
However, Chen said the policy-makers will not take action that
may lead to drastic fluctuations in the real estate market.
The economy will maintain its high growth rate next year,
considering the current momentum, and the renminbi may continue to
appreciate, said Chen. Moreover, domestic banks, which are weak in
terms of financial innovation, have few good options other than
individual housing lending. As a result, it is hard to control such
lending to the real estate sector, said Han.
There is no sign that "hot money," or speculative capital, is
retreating from China, Chen said. This indicates that speculators
are still optimistic about China's housing market.
Although the market needs to be properly managed, Wang Lina,
another CASS researcher on real estate, said that the warning does
not represent a judgement by the central bank that the real estate
market has entered a dangerous stage.
(China Daily December 9, 2006)