china restricts banks

China orders its banks to restrict real-estate loans
BLOOMBERG
Today
China ordered its banks to restrict real estate industry lending that totaled US$222 billion at the end of April in a move to reduce loan risk, avoid fraud and cool an overheated property market.

The People's Bank of China, in a statement on its Web site, said banks will be prohibited from making loans to developers for land purchases and from lending more than 70 percent of the value of property projects.

It also said loans for luxury villas and expensive apartments, which are in oversupply, will be curtailed.

The order is part of a government crackdown on property-related lending after former Premier Zhu Rongji warned last October that an expanding property bubble threatens the nation's economy and financial industry.

Earlier this month, Shanghai real estate tycoon Zhou Zhengyi was detained in a probe into 10 billion yuan of loans borrowed from six of China's biggest banks.

"This move is a knee-jerk reaction aimed at preventing more incidents like Zhou Zhengyi from happening again," said Ma Jun, who manages US$100 million at E Fund Management Co in Guangzhou.

"It's trying to warn banks to tighten procedures. A lot of banks have been lending based on personal credit standing rather than on collateral," Ma said.

Loans to developers comprised about 18 percent of China's 1.84 trillion yuan (US$221.8 billion) of bank lending at the end of April, the central bank said.

That compares with loans to homebuyers, which made up about 9 percent of lending, the central bank said.

China's Ministry of Land Resources decided at a March 11 meeting in Beijing that only ministry officials can approve land sales, according to a May 15 notice on its Web site.

That may end the sometimes cozy relations between local government officials empowered to sell land and developers willing to go to any length to get property as cheaply as possible.

"People with the power to grant land sales are getting rich, developers are getting rich, people have to pay more for housing and the banks are left to bear all the risk," said Zhang Qi, an analyst at Haitong Securities Co in Shanghai.

"The government has to show it's taking action against such corruption," Zhang said.

China's land ministry counted 81,000 cases of illegal land transactions last year, costing the nation an estimated 1.54 billion yuan, according to the Web site.

About one in 10 real estate loans made in the 12 months through Sept. 30 breached lending rules, the central bank said on Feb. 18.

"Zhou's case is just the tip of the iceberg," said Zhang.

The move to tighten lending "is a step to prevent the property sector from overheating and creating a bubble."

China's government wants banks to cut bad loans to 15 percent of total credit by 2005 from the current 25 percent.

Banks financed about one third of the 774 billion yuan invested in Chinese real estate last year, according to central bank figures.

"Property developers are the big clients that every bank is chasing, but there is a trade-off between risk and profit," said Wang Zhaohui, a spokesman of the Industrial & Commercial Bank of China, in Shanghai.

The People's Bank of China wants more loans directed to builders and to buyers of medium and lower-price apartments.

Buyers must put down at least 20 percent of the value of the property before they can take out a mortgage.

Loans cannot be made on uncompleted properties, the central bank said.