Commercial loans for property development and developers' land banks together with loans for individual house purchase have just become harder to get. This follows new restrictions introduced by the People's Bank of China, the nation's central bank.

When the news came in a central bank circular on June 13, industry insiders said the move was aimed at reducing credit risk, maintaining stability in the financial sector and dampening down an overheating real estate market.

Financing real estate is part of the core business of the commercial banks. By April 2003 they had real estate loans standing at some 1,836 billion yuan (US$222 billion) representing no less than 17 percent of their total lending. Mortgages added a further 9 percent to the banks' exposure at about 925 billion yuan (US$112 billion).

Real estate investment has surged dramatically in some regions since late 2002. House prices have risen but so has the number of empty apartments. While there is a shortage of affordable housing many luxury dwellings can be seen lying vacant.

Recent years have seen remarkable expansion in investment in housing. Rates of growth have far outstripped those of the economy as a whole. Significantly the incomes of potential house purchasers are also not growing so quickly.

Real estate investment in 2002 was up some 22 percent on the preceding year. What's more the trend has been accelerating with investment in the first quarter of 2003 up a staggering 35 percent on the same period last year.

By August 2002, some 945 million square meters of commercially built apartment floor space were lying vacant. The figure is set to increase as construction has continued to grow ahead of demand since then.

Warnings against overheating in real estate have been heard since the latter part of last year. Experts became concerned that if it were to go unchecked, the overheating might go on to develop into a property market bubble. Pointing to the precedent of the early 1990s they recognize the potential for a crisis affecting the whole financial system. Japan had to watch its economic recovery being held back as its commercial banks wrote off their bad debts.

The central bank has intervened with measures to raise both down payments and interest rates for luxury apartments and villas and also for second homes. The action to dampen down demand has attracted scathing criticism from the property developers.

Statistics show that 61 percent of capital for real estate comes from the banks. During the development phase, it would be typical for some 20 to 30 percent of start up capital to be borrowed by the developer. Then there are the loans for the 30 to 40 percent of total expenditure that needs to be set aside for the costs of construction.

Even after the developer has sold on the units and repaid these loans the banks will still be heavily involved for the long term as at least half of all house-buyers will have taken out a mortgage.

Central bank intervention will directly curb the surge in real estate borrowing and so address the problems of overheating. It will also serve to strengthen a banking sector that now finds itself with no choice but to improve the quality of its lending and reduce its exposure to bad debts.

The real estate industry does not exist in a vacuum. It impacts on a number of rapidly developing areas. The new central bank measures have a wider role to play in helping to keep the rapid development of the whole national economy on track.

(China.org.cn by Tang Fuchun June 27, 2003)