BOFIT Viikkokatsaus / BOFIT Weekly 2016/44

Access of real estate developers to external funding has been severely restricted since the past month. The financial magazine Caixin reports that the National Development and Reform Commission (NDRC) has cancelled bond issues by builders in mainland China and Hong Kong. The China Securities Regulatory Commission (CSRC) is withholding permission from mainland construction companies seeking to stage IPOs on the Hong Kong exchange. Officials are also in the process of drafting stricter guidelines for construction company bond issues. Without bond financing, it becomes harder to purchase land use rights, the prices of which have soared recently. By stricter rules, the government may also be trying to better shield investors from the increased risk in the branch and costly bailouts.

The new restrictions follow ad hoc attempts to deal with the overheating problem in dozens of cities. Measures such as higher downpayment requirements and limits on the number of apartments private persons could own were insufficient to stem the rise in prices. These measures are reminiscent of actions after the stock market collapse in summer 2015, when the state intervened heavily in the market.

The government’s measures are geared to slowing the rise in apartment prices, which in China’s big cities were still up on average 17 % y-o-y in September. The National Bureau of Statistics last week took the unusual step of releasing mid-month price figures for October. They showed a slowdown in price growth in urban apartment prices from September.

The housing price boom has been fuelled by easy access to housing loans. The stock of housing loans held by the banking sector at the end of September stood at 18 trillion yuan (25 % of GDP), an increase of 33 % y-o-y. In the third quarter, 70 % of new bank lending went to households, mostly in the form of housing loans. The People’s Bank of China has attempted to quiet the rapid growth in housing loans though use of its suasive policy tool known as “window guidance.” Media report that the PBoC last month invited representatives of the largest commercial banks to a meeting in Beijing, at which banks were encouraged to tighten their housing loan criteria and improve monitoring of loan performance.

PBoC figures show that the average interest rate on a housing loan was 4.6 % p.a. in June, about one percentage point lower than in summer 2015. Notably, many apartment buyers have borrowed their downpayment money from peer-to-peer lenders or used other financial arrangements provided by the shadow banking sector, where interest rates are considerably higher than those of regular banks.

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