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UPDATE: China Races to Curb Borrowing and Prevent Real Estate Bubble Implosion
- Move to restrain bank lending shakes international financial markets.
- Banks ordered to set aside more reserves with the central bank.
- Obtaining loans will be more difficult for businesses and consumers.
- Most housing remains unaffordable to working Chinese citizens.
- New developments mostly target the wealthy.
- Home sales in Beijing up 82% from 2009
- Home prices in Shanghai swell 87% from 2007 peak.
- Average price of a Beijing apartment is 15 times typical resident's annual household income. The U.S. ratio is 3 ½.
- About half of local government revenue comes from land sales which may now cool down.
- Real estate industry accounts for about 25% of China's gross domestic product.
(BEIJING, CHINA) -- Worried about a real estate bubble implosion, the Chinese government surprised global financial markets Friday, Feb. 12, by ordering banks to set aside more reserves with China's Central Bank instead of making unlimited loans to merchants and consumers.
Please see related Real Estate Channel postings:
- Bankers Play Down Housing Bubble in Canada as Prices and Sales Soar to Record Highs, Feb. 15, 2010
- Record Land Sales in China Keep Real Estate Bubble from Bursting, Feb. 5, 2010
- Japan's Housing Starts Drop to 45 Year Record Lows, Feb. 1, 2010
- Bubble Bursts for India's Once-Booming Real Estate Market, Jan. 26, 2010
By closing the lending spigot, China is reversing itself from its 2009 position which saw banks shell out a record total $1.4 trillion in loans compared with $720 billion in 2008, the Los Angeles Times reports.
Touted as the strongest economy in Asia, Chinese government officials now hope their move to curb borrowing will also crimp any surge in inflation, according to international observers who monitor China's economy daily.
"If the bubble bursts, it will be a huge blow to China's financial system," Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, tells the L.A. Times.
In a research paper, Jing Ulrich, a J.P. Morgan analyst in Hong Kong, says "the message coming out of China in recent weeks has been quite clear: Policymakers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles as a result of last year's aggressive expansion of credit."
Jing Ulrich
Other analysts see China working its way out of whatever bubble is developing.
"Given China's potential growth, its real estate market has plenty of room for enlargement over the long term," Koyo Ozeki, head of the Asian credit research group for Newport Beach, CA-based investment firm Pimco, says in a recent report cited by the Times.
Ozeki bases his outlook on the amount of credit that was extended to the Chinese property sector from 2003 to 2009. That number equaled 40% of China's gross domestic product. In the U.S., the figure was 80% from 2000 to 2007.
Koyo Ozeki
Closing the credit spigot to businesses and consumers, however, may be difficult, the Times notes. Up to half of local government revenue is estimated to come from land sales.
Additionally, the real estate industry as a whole accounted for about 25% of China's GDP in 2009. That percentage includes revenue from secondary real estate sectors such as cement and steel, the newspaper notes.
Most analysts, however, agree that whatever real estate downturn occurs in China, it won't equal the crisis experienced in the U.S.
Arthur Kroeber
The newspaper cites an observation by Arthur Kroeber, managing director of Beijing economics research firm Dragonomics.
Kroeber notes the Chinese aren't exposed to the low-to-no-down-payment loans once popular in the U.S. Down payments in China average 40% to 60% of the sales price.
That is more than the legal minimum for first homes. Additionally, many banks are barred from writing a loan if a mortgage equals half or more of a customer's monthly income.
"The amount of buyer leverage is far, far lower (in China) than in the U.S.," says Kroeber.
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