China acts on property speculation, tests banks anew

BEIJING: China's banking regulator has ordered lenders to test the impact of a fall in house prices of up to 50% in key cities where prices have risen sharply, banking and regulatory sources said on Thursday, Aug 5.

The China Banking Regulatory Commission (CBRC) has also instructed banks to stop extending mortgages to people buying their third homes in four of the cities: Beijing, Shanghai, Shenzhen and Hangzhou, the sources said.

The move, which runs counter to speculation in some quarters that China might ease some curbs before long to boost the slowing economy, is a fresh demonstration that Beijing is intent on fighting property speculation and deflating record high prices.

The government fears sky-high prices in major cities are feeding on themselves and making it impossible for ordinary people to get a foot on the housing ladder.

"This is another key signal that the government is trying to give -- that it is quite determined to keep property prices under control, even though it's quite unlikely that there will be any new tightening measures in the short term," said David Ng, a property analyst with Royal Bank of Scotland in Hong Kong.

"It certainly won't have any loosening measures for now," he added.

An earlier stress test nationwide showed that Chinese banks could sustain a drop in housing prices of up to 30% without a sharp rise in non-performing loan ratios.

This is a new round and will be carried out only in key cities where prices have risen fast," a banking official said on condition of anonymity.

The CBRC was not immediately available for comment.

Getting tough

Three other banking sources said the CBRC has also instructed banks to tighten mortgage terms for third-home buyers in cities other than Beijing, Shanghai, Shenzhen and Hangzhou.

Banks must now require a down payment of at least 60% and charge interest of at least 1.5 times the central bank's benchmark rate, they said.

The new requirements clarify cabinet guidelines issued in April, which instructed banks to "substantially increase" down payments and mortgage rates for third-home buyers.

Depending on their assessment of risks, banks can also stop lending to such buyers in cities where prices are too high or rising too fast or where homes are in short supply, the State Council said.

A source with Industrial and Commercial Bank of China in Shanghai said it stopped making loans to third-home purchasers in the city this week.

Almost all banks in Beijing had suspended such lending, the sources said.

Don't loosen up

Xia Bin, an academic adviser to the central bank, said the clampdown on the real estate market, fuelled by record surge of lending last year, had achieved the desired results.

Property prices in 70 major Chinese cities fell 0.1% in June from May, the first month-on-month drop since February 2009. Sales volumes in big cities have also fallen sharply.

Writing in the China Daily, Xia said increasing the capital gains tax might be an effective short-term measure to curb speculation.

More broadly, he said, it was too early for the government to relax its curbs, which include a reduced lending target.

"These macro-controls must be implemented stringently in the coming months as well," he said.

Shanghai's property share index fell by over 2% in early trade, underperforming the broad market.

By 0330 GMT, China Vanke lost 2.8%, while China Overseas' Hong Kong-listed shares fell 1.6%, lagging their main stock market indices.

The two firms are China's top listed developers by sales and market value, respectively.

"The negative impact on property share prices will be subdued for now. The most important thing to watch out for will be its impact on developers' sales over the next 1-2 months," said Ng at RBS.

"If developers are forced to cut prices significantly because of a sharp fall in transactions, that's going to be a major drag on property shares," he said. -- Reuters
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