[photopress:Shanghai.gif,full,alignright]A timely and intelligent warning from the central bank says that fluctuations in the real estate market may threaten banking security.
It has published the logically named Financial Stability Report 2006, which states that the overall performance of 16 major commercial banks had improved by the end of 2005.
Then came the warning.
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.’
According to the report the bad loan ratio of the 16 banks for individual consumer lending, 90% of which is individual housing loans, was 2.55% by the end of last year, 0.75 percentage points higher (not a lot higher but still very high) than a year before.
The report seriously warned that price drops would have an impact on the macro-economy and the effect of that will spill over to affect financial stability. And the depreciation of house values, as a result of price falls, will lead to devalued banking assets. All of which makes solid sense. If the housing boom stops then the strong possibility, based on historical experience, is that it will go in reverse with serious and widespread results.
To get a handle on the problem the report points out that the ratio of individual housing loans to the overall volume of credit in financial institutions rose from 6% in 2000 to 21% in 2003. By the end of 2005, the ratio for long-term loans was 33.9%. These are figures for serious concern.
Chen Gong, chief analyst and chairman of Beijing-based Anbound Consulting, said, ‘It sends a clear message that the central bank wants the commercial banks to do something.’ With which no one could disagree. The question is what.
It is not common practice among real estate agents to point out to buyers that prices can go down as well as up.
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. That has not happened as yet.
It may be a conflict between the central government which sees the big picture, and local goverments which would like to see more money coming in.
Han Meng, a researcher at the Institute of Economics of the Chinese Academy of Social Sciences (CASS) said, ‘The central government wants to maintain rational economic growth, but local governments want to further expand their investment scale, which pushes up housing prices.’
So, despite the macro-economic regulation, the price of new houses in 70 major cities rose 6.6% year-on-year in October. From January to September, house prices in Beijing rose 10.9% year-on-year.
Specific action is being taken. China’s central bank has confirmed it has told banks to buy US$20 billion in bonds in the government’s latest effort to rein in the lending boom.
This order applies to 20 institutions, including China’s top five state-owned banks and 10 other commercial banks, said official news agency Xinhua. The size of the RMB160 billion(US$20 billion) bond issue was nearly double the RMB100 billion (US$12 billion) figure that was originally suggested. The bond sale is meant to help cool off a boom in real estate development by shrinking the pool of money available for lending. This is the fourth time this year the central bank has ordered banks to buy bonds.
Source: China Daily