New measures needed for real estate growth

07/08/2003
China Daily

Heated debate has arisen in financial markets after the People's Bank of China (PBOC) issued a circular last month about tightening control on real estate loans.

The central bank now requires commercial banks to improve their lending to real-estate developers, strengthen credit management and increase down payments for buyers who are purchasing second homes and luxury houses.

Obviously, the core of the policy is to reduce potential credit risks for the commercial banks.

But developers and some scholars complain that it will hinder the sector's growth.

Industry regulators and some researchers, on the other hand, stress the vital importance of curbing potential risks and squeezing out "bubbles" in the sector.

While they cannot reach a consensus, the two sides agree on one fact: The developers' capital comes mainly from the banks.

Right now, 70 per cent of the capital for real estate development comes from bank loans. Out of the 1.9 trillion yuan (US$229 billion) dispensed in bank loans in China last year, about 600 billion (US$72 billion) went to the real estate industry.

It is an unduly high proportion, despite the sector's overwhelming role in the country's economic picture. Real estate contributes roughly 2 percentage points to China's gross domestic product growth.

A high concentration of the sector's capital source not only incurs potential risks for the banks, but may affect the industry once the outside financial environment changes.

While the country cannot afford to see the slow-down of the real estate sector, it is not willing to see its commercial banks painfully struggle with bad loan problems, either.

The central bank has to be very careful in this respect.

But given the nature of the real estate sector - it is a capital-intensive industry - a large amount of capital input is crucial.

Financing channels other than bank loans, therefore, must be developed steadily and rapidly to shore up the sector's long-term growth.

In a mature real estate market, the main financing channels do not include bank lending. In Hong Kong or the United States, for example, equity financing and bonds are the main methods.

In China, the stock market is not a good capital source for real estate developers. Only about 100 firms out of more than 20,000 are listed in the stock market.

Under these conditions, the authorities could learn from their Western counterparts to experiment with real estate investment trusts and mortgage-backed securitization.

The real estate investment trust has proved to be an effective financial instrument in Western economies. By pooling together investors' capital, the fund links potential buyers eying the real estate sector with the developers, solving the problem of a capital shortage.

It does not add to the liabilities of enterprises, and can play a supervisory role in the management of real estate companies.

However, financial innovations are sometimes a gamble on their own. Introducing them to the domestic market must be cautious. Detailed policies must first be clarified to regulate these new practices.