China to curb use of debt for property soon

Source : Business Times – 10 Nov 2009

China’s central bank and banking regulator may ’soon’ issue measures to limit the use of debt in property purchases after asset prices climbed, a Shanghai official said.

Regulators may reduce ‘leverage ratios’, Fang Xinghai, the director-general of Shanghai’s financial services office, said at a forum in Beijing yesterday.

A record US$1.27 trillion of new loans this year and inflows of cash from investors betting that the yuan will appreciate threaten to create stock and property bubbles. China’s banking regulator plans to review debt levels at some developers on concern that borrowings are fuelling excessive gains in property prices, a person familiar with the matter said previously.

‘Asset prices may continue to climb as foreign capital flows into China betting on the yuan’s gain,’ said Xing Ziqiang, an economist at China International Capital Corp in Beijing.

A measure of property stocks on the Shanghai Composite Index declined one per cent, the biggest fall among five industry groups.

‘Given the rise of asset prices, whether in real estate or the stock market, or some kind of other assets, there is a case for reducing the leverage ratio in these areas, particularly in the real estate area,’ Mr Fang said yesterday.

His office is a local regulator and policymaker, underneath the Shanghai government.

While home prices rose at the fastest pace in a year in September and the Shanghai Composite Index of stocks has climbed 73 per cent this year, Mr Fang is ‘not concerned’ at asset-price levels. Existing rules, such as a 30 per cent down-payment requirement for first mortgages and restrictions on borrowing to buy stocks, limit risks to the financial system, he said.

The China Banking Regulatory Commission said on Oct 28 that it plans to tighten rules on personal loans to prevent them from being used for speculation.

The commission also wants to reduce leverage at developers that bought land at inflated prices and at large state-owned companies that have entered the property market, the person familiar with the matter said, declining to be identified because the plans hadn’t been made public.

Excessive borrowing by some developers threatens to cause an increase in delinquent debts should prices collapse, the person said.