As China's property market develops, attention should be paid to the economical use of land and small and medium-sized housing projects should be encouraged, a senior official said Sunday.

Moreover, the government should provide developers other financing channels besides bank loans, said Wu Xiaoling, vice-governor of the People's Bank of China, the country's central bank, when making a speech at a property forum in Beijing yesterday.

Although there is an increasing demand for housing due to factors such as urbanization, resettlement projects, people's desire to improve their standard of living and fixed-asset investment, the country's limited resources cannot predict and meet this demand, the governor said.

China has seen a high rate of urbanization, jumping from less than 30 percent in 1995 to 41 percent last year. This is twice that of the global average over the same period.

"People's housing demand is huge and the present supply falls far short of it," said Meng Xiaosu, chairman of the China Real Estate Development Corp.

However, housing demand calculated theoretically is different from the actual demand which should be based on the possible supply of resources and people's income, said Wu Xiaoling.

"The biggest barrier is land supply," she added.

Property development has been taking away much of the country's fertile land, which is shrinking all the time. Land per capita in China is about 0.777 hectares, which is only about one third of the global average.

People should be encouraged to buy small and medium-sized homes to save land, and those buying large and luxurious houses should be subject to higher interest rates and taxes, Wu said.

Last year, the growth rate of average income surpassed that of housing prices.

Most of the demand is from ordinary wage earners who cannot afford high housing prices and have to get mortgages, which can be risky for banks, Wu added.

The governor also pointed out that besides measures such as loan rate adjustment, levying taxes, strict land policy and a welfare system to build a healthy property market, the government should offer developers more financing channels so as to share risks with commercial lenders.

Although the non-performing mortgage rate now is about 0.12 percent, the gap in the growth pace of rental prices and house prices in many cities is widening, according to Wu.

In Shanghai, house prices increased by 56 percent from 1998 to 2004, but rent increased by only 10 percent over the same period. In Ningbo in eastern Zhejiang Province, house prices increased by 75.4 percent from 1998 to 2004, but rent has fallen by 4 percent in the past six years, according to figures provided by Wu.

The difference shows the gap between current house prices and their real value, and warns of bubbles and potential risk, said Zhang Yan, an analyst from China Securities in Beijing.

Currently 70 to 80 percent of developers' capital comes from bank loans, which puts the banks at huge financial risk.

"We should develop diversified financing channels for property development. Issuing stocks and debt, housing loan securitization and other financial tools are desirable routes to pursue," Wu said.

(China Daily April 11, 2005)