Chinese property market faces heavy financial risks

The sizzling Chinese property market faces heavy risks as the price keeps going up, said a report from the People's Bank of China here Monday.

The property price in some parts of China witnessed fast growth in 2004, which may be turned into housing bubble, acknowledged the report. Once the bubble burst, the bank, who has made loans to the houses buyers, will suffer great loss.

The risks also come from property developers, who mainly channeled their development fund from the bank, noted the report. As the country set higher threshold for the industry and tightened credit loans, the capital chain might have difficulty or even break down. Then the developers will not be able to repay the loans.

The central bank statistics showed that the housing loan, including loans made to the property developers and individual buyers, stood at 2.6 trillion yuan (about 310 billion US dollars) by the end of 2004, accounting for about 15 percent of the total RMB loans.

False mortgage is another factor bringing risks to Chinese banks, said the report.

As the interest rate of individual housing credit is lower than that of property developing loans, some developers get loans by illegally house purchasing with employees pretending consumers, some of whom repaid the loan after selling houses while some others fled for being incapable of selling the houses out.

Local land reserve centers, which get credit from commercial banks for land purchase, however will be taken as a financing channel when local governments are facing capital limits. As a result, income from land selling is appropriated for other use and their payment of debts for banks will even be averted.

According to the report, by the end of 2004, China's land reserve loan has reached 82.84 billion yuan (some 10.2 billion US dollars), bringing more difficulties to Chinese banks for supervision on the use of the fee for land use right.

Furthermore, there still exist operation risks in basic banks such as inaccurate loan review and management confusion.

According to a newly issued regulation, the banks have no power to sell the houses for recalling the loan even if the houses buyers refuse to pay the loan. Such regulations have also brought certain legal risks to house credit of banks, said the report.

However, local banks have issued some measures to dissolve those risks, said the report.

For example, commercial banks in Shanghai have raised the ratio of first payment for apartments or houses to 50 percent so as to reduce the risks of depreciation of house values.

The central bank asks all banks to abide by loan criteria for housing developers to bar the above risks, to improve the penalty system, to enhance risks control of interest rate, to improve housing guarantee system and to make further research on housing loan insurance system.