China's banks told to tighten mortgages
By Jamil Anderlini in Beijing
Thursday, July 24, 2008
Chinese officials and government economists have warned domestic banks to tighten their mortgage lending criteria after the US government's action to prop up Fannie Mae and Freddie Mac, the giant mortgage agencies.
Liu Mingkang, China's top banking regulator, has in recent days urged the country's state-owned commercial banks to beware of risks in the real estate sector and ordered them to tighten loan approval processes.
Others among China's policy community have also begun to express concerns about the health of the country's banks amid signs a once-booming property sector has begun to slow.
Average house prices in China's 70 largest cities were up 10.2 per cent from a year earlier by the end of June, according to official figures. But sales volumes in important cities, including Shanghai, Beijing and Shenzhen, have fallen precipitously in recent months. Some analysts fear steep price falls ahead.
“If financial institutions of Freddie Mac and Fannie Mae's calibre could get into such a bad situation, then what does that mean for Chinese financial institutions?” asked Yi Xianrong, a prominent economist at the China Academy of Social Sciences. “The only reason we haven't seen similar problems here is because property prices have continued to rise rapidly.”
Lending standards at Chinese banks are often much looser than in developed countries, in part because China is still in the early stages of building a credit rating system. “Anyone can get a mortgage loan in China, no matter who they are,” Mr Yi told the Financial Times. “There is also a huge amount of speculation in the market and insider dealing when it comes to bank officers granting loans.”
Yet, to date the default rate in China has been relatively low.
The overall stock of household savings in China is about five times larger than total outstanding consumer debts including mortgages. More than half the population are peasants without means to invest in property.
A massive demographic shift in China is under way. Official policies aim to coax more than 150m peasants into urban jobs by 2020, a push expected to drive demand for real estate for decades.
A lack of investment options in China also leads investors to speculate in the real estate market, driving prices beyond the reach of many citizens.
