The central bank proved its vigilance earlier this year when it
chose to minimize financial risks in the real estate industry by regulating
housing loans.
In June, it issued a circular asking commercial banks to limit lending to
real estate developers, strengthen credit management and increase the down
payment thresholds for buyers of second homes and luxury houses.
Banks can reduce the risks involved in housing loans -- one of their best
assets -- by making down payments mandatory. But if real estate prices drop
dramatically in the future, even a large down payment will not help the bank
recover its loan.
Fortunately, the present state of the economy makes such a scenario unlikely.
The ups and downs of real estate prices usually mirror those of the economy,
while steep falls in property prices are often preceded by dramatic inflation.
Currently, China's economy is growing strongly despite the SARS outbreak this
spring. And the shadow of deflation over China since the 1997 financial crisis
is yet to fade.
So there is no reason to worry about a real estate recession in the near
future. And the recent growth of investment in property reflects market
confidence in the economy.
A tightened policy on housing credit will probably widen the gap between
demand and supply in the real estate market and push up prices.
The central bank's determination to curb improper practices and mismanagement
of housing loans is understandable. But to realize this goal, many of its
regulatory measures should be improved in line with the market situation.
According to the central bank's regulation, loans got from the mortgaged
houses in a city are prohibited to be used in other cities. Such ban is seen by
the authorities to be effective in eliminating risk.
However, the widespread existence of the banned practice reveals that
different regions do differ in their need for capital, which is natural in a
market-driven economy.
The authorities should recognize these differences and provide proper
guidance for capital flow.
Another example is the central bank's limit on loans for people buying a
second house to prevent speculative purchases.
As the economy grows, more people will put their houses up for sale to buy
larger and better houses, and demand for rented houses will also increase when
people become freer to move between cities. In either case, a second home is
needed and the purchase has nothing to do with speculation.