Liu Shiyu: Earnestly strengthening commercial real estate management
to adjust real estate credit structure and prevent credit risks
Speech by Mr Liu Shiyu, Deputy Governor of the People's Bank of China, at the Conference
on Strengthening Commercial Real Estate Credit Management, Beijing, 11 December 2007.
* * *
Housing is a basic need for people's livelihood. The CPC Central Committee, State Council
and Party Committees and local governments at various levels attach great importance to
housing, and the healthy development of the real estate industry and real estate finance. On
August 23, 2007 the State Council convened the National Urban Housing Work Conference,
in which new requirements about how to strengthen macro-adjustment of the real estate
market and to provide affordable housing to low-income households in a faster manner were
put forward. The People's Bank of China (PBC) and China Banking Regulatory Commission
(CBRC), in order to implement the spirit of the Urban Housing Work Conference, issued
Notice of the People's Bank of China and the China Banking Regulatory Commission on
Strengthening Management of Commercial Real Estate Credit (hereafter referred to as the
"Notice") on September 27, which immediately came to the attention of commercial banks.
Requirements outlined in the Notice are followed in an earnest manner to improve credit risk
management in the real estate sector. The public is generally positive toward the Notice,
whose effect is gradually unfolding. Pursuant to the spirit of the Central Economic Work
Conference and the requirements to develop the housing sector and housing consumption,
with a view to keep the seriousness, efficacy and development trend of the credit policies, to
speed up credit restructuring and to forestall credit risks, the PBC and CBRC, after extensive
study and soliciting opinions from commercial banks and relevant authorities, jointly issued
the Supplementary Notice of the People's Bank of China and the China Banking Regulatory
Commission on Strengthening Management of Commercial Real Estate Credit
(hereafter
referred to as the "Supplementary Notice"), which clarifies some regulations on strengthening
the management of housing consumption credit.
Good results achieved in developing the real estate market and real estate finance
With the rapid development of the national economy and the deepening reform of the urban
housing system, more houses are being constructed. Real estate sector has become an
important driving force for economic growth, and real estate finance dominated by housing
development and consumption credit has become an important business of commercial
banks. The real estate market and the real estate financial market develop rapidly and have
achieved good results.
First, the housing quality in urban areas continues to improve. From 2003 to 2006, the
average annual acreage of completed new homes exceeded 600 million square meters,
while the per capita acreage grew from 23.5 square meters to 27 square meters. As of end
2006, 80% of urban residents live in independent homes.
Second, housing security system makes continuous headways. As of end 2006, completed
acreage of affordable housing (including housing built for employees with collected funds)
across China surpassed 1.3 billion square meters, enough to accommodate 1.65 million
lowincome households. As of October 2007, 644 out of 656 cities established the low-rent
housing system, accounting for 98.2% of the total, and improving the living conditions of
681,000 low-income families. As of September 2007, over 100 million employees were
covered by the Housing Provident Fund scheme. Housing provident fund contribution totaled
1.5 trillion yuan, with a balance of 900 billion yuan. About 42 million employees enjoyed
better housing conditions by utilizing the housing provident fund and applying for housing
provident fund loans.
Third, real estate financial businesses develop rapidly. As of October 2007, outstanding
commercial real estate loans of major financial institutions stood at 4.69 trillion yuan,
accounting for 18.02% of the total RMB outstanding loans. Outstanding loans for real estate
development amounted to 1.76 trillion yuan, while outstanding individual housing loans 2.6
trillion yuan, accounting for 6.76% and 9.99% of the total outstanding RMB loans in financial
institutions. Outstanding loans guaranteed by housing provident fund reached 450.22 billion
yuan, nearly 18% of the individual housing loans issued by commercial banks. A housing
financial system combining commercial loans and policy loans take form. Fast-developing
real estate consumption loans not only help tens of thousands of households to realize their
dreams of having their own houses, but also expand domestic demand, support economic
growth and promote social harmony.
Fourth, progress has been made in real estate financial products innovation. In recent years,
commercial banks have developed and launched fixed interest payment, grace period
payment, housing relay loans and other products that improve efficiency and create more
alternatives to borrowers. Some commercial banks tapped the possibility of reverse
mortgage loans that link self-occupied housing with pensions. Housing mortgage-backed
securities were issued. Pilot programs of commercial housing loans securitization are under
way.
China is a developing country with a population of 1.3 billion, out of which over 500 million
live in urban areas. It is already an achievement that we have improved the living conditions
of urban residents within such a short period of time. Commercial banks have played an
important role in this process, which deserves full recognition. Such achievements would be
impossible without the leadership of the Communist Party of China, market-oriented reform,
opening-up, and priority given to housing, employment, agriculture and other key issues.
Major problems and challenges at the current stage
I. Major problems in the real estate market
Though the real estate market and the real estate financial businesses develop rapidly, we
have also noticed that recently such acute problems as excessively rapid growth of housing
prices in certain cities, irrational supply and demand structure, inability of low-income people
to afford housing, etc.
1. Commercial housing price has been on the rise. From 2003 to 2005, the y-o-y
growth of urban housing price registered 5.1%, 10.8%, 6.5% and 5.3% respectively.
As of October 2007, the y-o-y growth of sales prices in 70 large-and-medium-sized
cities averaged at 9.5%. Sales prices of newly constructed commercial housing rose
by 10.6%, representing an overall upward trend.
2. The mix of housing available in the market is irrational. Aggregate supply is
insufficient, especially the supply of medium-and-small-sized apartments. Statistics
from the Ministry of Construction show that at the beginning of 2006, only 19.18% of
the residential area of commercial housing on sale in 40 big cities was less than 90
square meters. The proportion rose slightly to 25.77% by October 2007, still far
behind the regulatory objective stipulated in prevailing rules and regulations.
3. Macro-regulation policies are not completely in force. In recent years, with regard to
the rapid price hike and irrational housing mix available, the State Council has
adopted a series of policies to strengthen macro-regulation over the real estate
market, which have yielded some results, but there are still some policies that are
not put in place in a few localities. There is an apparent shortage of
medium-andlow-priced and medium-and-small-sized housing. From January to October 2007,
investment in housing less than 90 square meters only accounted for 21.46% of the
total housing investment. Some developers hoarded land and curtailed supply to
push up prices. From January to October 2007, housing investment grew by 31.4%
nationwide, with floor space newly constructed up by 22.6%, but completed acreage
by merely 9.1%.
4. Low-income households have difficulties in affordability. At present, nearly 10 million
urban households whose per capita floor space of residential housing is below 10
square meters. Among them, 4 million households receive subsistence allowances,
accounting for 5.5% of the total number of urban households. At the same time,
persistent price hike and slow development in small-and-medium-sized house lease
market make it difficult for low-income households to purchase or rent houses in the
market.
The above problems, though limited to certain localities and created by structural imbalance,
have huge impact on society due to the following reasons. First, mismatch between supply
and demand is acute. From the demand side, there is a continuously strong demand as a
result of higher income and faster urbanization. From the supply side, the insufficient
aggregate demand is coupled with imbalanced mix of housing available and shortage of
supply of small-and-medium-sized apartments. From January to October 2007, floor space
completed stood at 232 million square meters, up 8.8% y-o-y. Sold space grew by 33.1%
yo-y to 489 million square meters, 2.11 times of space completed, resulting in a slower growth
of supply than that of demand. Second, shortage of residential construction land and price
hike of land, raw materials and wages push up sales prices. Third, psychological
expectations and housing price hike interact. Urban residents prefer purchase to lease, early
purchase to late purchase and big apartments to small apartments. After having purchased
their own apartments, some people make speculative investment, which further pushes up
housing prices. Fourth, housing price hike in the international market is contagious. In recent
years, the global housing market has witnessed faster price hike during a longer period time
with far more wide-ranging impact than any other period of time before, not only in developed
countries such as the US, UK, France, Spain, Italy, Belgium, Denmark, Sweden and
Australia, but also in Brazil, India, Thailand and other developing countries. From 2001 to
2006, housing price in the US, France and the UK rose by 54.9%, 50% and 85.4%
respectively, while the single-year price hike in the three countries was 11.32% in 2005 for
the US, 16.25% in 2005 for France and 24.86% in 2002 for the UK. Driven by economic
globalization, worldwide liquidity surplus and international flow of capital, housing price hike
spreads globally.
II. Problems in real estate finance
1. The real estate credit is growing excessively fast. As of end of October 2007,
outstanding commercial housing loans reached 4.69 trillion yuan, a y-o-y growth of
30.75%, up 1.01 trillion yuan from the beginning of the year, accounting for 28.9% of
the total new RMB loans of commercial banks during the same period of time.
Outstanding individual housing loan reached 2.6 trillion yuan, 619.2 billion yuan
more than the beginning of the year, up 35.57% y-o-y. Entrusted loans with housing
provident fund reached 450.22 billion yuan at the end of October, up 96 billion yuan
than the year beginning, up 34.87% over the same period of last year.
2. Competition is extremely fierce, creating huge underlying risks. At present, real
estate loans, especially individual housing loans, are classified as prime assets. To
take more market share, local offices of some commercial banks lower lending
criteria, reduce examination steps and relax investigation through distorted practice.
As a result, banks assets become less secure. In 2006, competent authorities find
out after sampling and surveying housing loans in 16 cities that on average 22.31%
of borrowers didn't meet loan officers directly when getting loans. In cities including
Zhengzhou, Beijing, Hangzhou and Guangzhou, this proportion is 46.31%, 35.4%,
32.83% and 32.2% respectively.
3. Mortgage refinance loans and additional mortgage loans are granted without proper
approval. The multipliers of mortgage refinance loans and additional mortgage loans
generally fluctuate with the value of real estate, likely to magnify housing credit
when the economy grows and housing price soars. In addition, most credit is used
to purchase more houses or to invest in the stock market, creating more potential
risks to the banking system and accumulating more bubbles in the real estate and
stock markets. As of end-August 2007, outstanding mortgage refinance loans and
additional loans in 16 major cities reached 41 billion yuan, 3.5 times of that in the
same period of last year.
4. Weak loan management unveils risks associated with "fake mortgage". A few
branches and sub-branches of commercial banks defy the requirements of "three
examinations". Some of them even collaborate with real estate developers and real
estate agents to make up housing mortgage loan contracts in order to grant loans
for real estate developments under the name of housing consumption loans, or to
help developers to speculate on difficult-to-sell buildings through "fake mortgage".
Attach great importance to lessons drawn from real estate markets in other countries
Real estate markets in many countries and regions have experienced cyclical fluctuations or
even bubble bursts. This is particularly true in recent years when some developed countries
and developing countries are on the downside of the curve after continuous price hike. A few
of them are exploring measures to achieve "soft landing", which deserves our close attention.
The real estate bubble in Japan in the 1990s, real estate bubble in Hong Kong after the
Asian financial crisis and the sub-prime crisis this year in the US are well known. Some
valuable points can be summarized after in-depth and comprehensive analysis of the above
crises and other problems in the international real estate market.
First, real estate industry is an important driving force or a pillar industry for a country or
region. Real estate industry concerns over 50 other industries, so the development of the
real estate industry closely relates to the overall economic growth. When economy is in the
upside curve of the cycle, the real estate industry grows continuously. But when economy
goes downward, real estate industry experiences shrinking investment and consumption. If
real estate bubbles burst due to economic or political factors, housing prices will plummet
before economic slowdown at a faster rate than overall economic growth, inflicting greater
impacts on consumer confidence and economic growth than any other industry.
Second, real estate industry is a typical capital-intensive industry, and its development
provides space for financial development and innovation. However, real estate industry
influences the financial sector. If banks fail to prevent risks associated with real estate loans,
relax lending criteria, and grant more individual mortgage loans and development loans, then
bubbles are likely to appear or accumulate, whose burst will threaten the banking system or
even financial security, and further influence economic, social and political stability.
Third, housing is a basic need for people's livelihood as well as a public good. It is necessary
for the government to adopt guarantee measures, and for financial institutions to perform
social responsibilities. However, new risks will be triggered if banks are allowed or
encouraged to provide excessive loans to low-income households. Before the sub-prime
crisis in the US, most low-income borrowers were too optimistic about their income and
applied for loans that they couldn't afford to repay. But the market is volatile; the running of
the economic cycle is not at the control of borrowers. When income shrinks or interest rate
resets, borrowers will have to pay more, and potential risks translate into actual crisis.
Fourth, securitization and credit derivatives have played a positive role in terms of
diversifying home loan risks, expanding real estate finance to more financial institutions and
other institutional investors, and diversifying risks in the banking system. However, if
commercial banks, investment banks, institutional investors, auditors and rating agencies are
myopic and weak in information disclosure, risks connected with real estate finance are likely
to be covered or underestimated. In the US sub-prime crisis, underestimation of the risks
associated with sub-prime loans-backed securitization products or credit derivatives makes
the sub-prime crisis unnoticeable, abrupt and highly contagious.
Fifth, it is necessary to improve or relax financial control in order to fully display the
fundamental role of the financial market in resources allocation and to provide a favorable
environment for financial innovation. However, governments shall master the laws governing
the functioning of market. If governments don't perform market supervision, early warning
and forward-looking risk guidance, they will fail to prevent risks from happening.
Sixth, in the process of economic integration, it is a logical choice for developing countries to
open up to the outside world and utilize foreign capital in order to achieve fast economic
development. However, due to surplus liquidity and cross-border capital flow, foreign capital
will have a greater impact on domestic capital markets, especially the markets in countries
and regions that experience persistent economic growth and local currency appreciation,
which are more likely to fall prey to hot money.
Earnestly strengthen real estate credit management
In recent years, the PBC and CBRC have issued a series of policy guidelines and
supervisory regulations in accordance with state policies on housing development and
consumption, with the purpose to promote the healthy development of the real estate
financial businesses and to prevent financial risks. Not long ago, in order to accomplish the
tasks put forward in the urban residential housing work conference, the PBC and CBRC
jointly issued the Notice, which specifies the requirements on how to strengthen commercial
housing credit management. Regulation of real estate credit is emphasized from different
perspectives: 1) stricter management of real estate development loans; 2) strengthened
management of housing consumption loans, especially prohibition of mortgage refinance
loans and additional mortgage loans for unspecified purposes and fluctuating with the
valuation of real estate; 3) guidance of individuals' consumption and investment and higher
minimum down payment ratio and lending interest rate for second home mortgages; 4)
inclusion of solely foreign-invested commercial banks and joint-stock commercial banks into
the regulatory policy system; 5) strengthened credit information management in the real
estate sector to fully leverage the credit information system that includes both enterprises
and individuals.
Recently the PBC and the CBRC issued the Supplementary Notice in accordance with
housing consumption policies and other policies at the state level. First, the number of home
loans is calculated by households (including loan applicants, their spouses and children). In
China, housing is a necessity for family life, so it is more reasonable to calculate the number
of home loans by households, both in line with our national situation, and conducive to the
enforcement of the Notice, guidance and promotion the reasonable allocation of real estate
resources and strengthening the macro-regulation of the real estate industry. Second, given
the reasonable demand of residents to improve their living conditions, households having
purchased the first home with loans whose per capita residential space is lower than the
local average level, first home loan rate applies if such households apply for a second
mortgage, so as to curtail irrational demand (including speculation) and improve people's
living conditions. This policy is consistent with the Notice. After borrowers present information
of total living space certified by real estate administrative authority according to their
registration information, commercial banks decide whether first home loan rate shall apply
against living space information, residential permit and other documents, while the average
per capita residential space comes from last year's figure released by statistics department.
Second home interest rate applies to re-borrowers who don't conform to the above
conditions. Third, the Supplementary Notice prescribes that housing provident fund loans are
also subject to the Notice. Either housing provident fund loans or commercial loans are the
liabilities of households. Housing provident fund loans will not exempt from market volatility.
Therefore, second home loan rate applies to households who are in housing provident fund
loan scheme and who are applying for commercial loans.
There are some requirements concerning how to further implement the Notice and the
Supplementary Notice.
First, reach a common understanding. Regional offices of PBC, CBRC and commercial
banks shall carefully study the spirits of the 17th CPC Congress and Central Economic Work
Conference, implement the scientific approach to development, exercise tight monetary
policies, strengthen regulation over real estate credit, improve management of real estate
credit risks, speed up real estate credit restructuring, drive forward real estate financial
innovation so as to promote the healthy development of the real estate market.
Second, streamline risk management stipulations. Headquarters of commercial banks shall
improve and unify bank-wide real estate credit management stipulations, and all their
branches and sub-branches shall grant real estate loans in strict conformity with such
stipulations. Units and staff responsible for real estate financial businesses shall explain
lending policies to their customers in order to safeguard the seriousness of credit policies.
Third, make sure that all relevant policies are put in place. Principles and polices on real
estate credit regulation are specified in the Notice and Supplementary Notice. They key is
implementation. Mortgage refinance loans and additional mortgage loans shall be eradicated
steadfastly to achieve zero mortgage refinance without specific information or real
transactions and zero additional mortgages. Commercial banks shall refrain from accepting
applications with false information or certificates, and notify local banking associations.
Fourth, improve financial services for protective housing development. Commercial banks, in
addition to improving commercial credit risk management, shall restructure the credit mix to
give priority to ordinary commercial housing and affordable housing and households capable
of making repayment and applying for loans to buy self-occupied houses. At the same time,
commercial banks shall improve their services for affordable housing and low-rent housing in
the preconditions of risk control and in accordance with the state housing guarantee system.
Improve the low-rent housing system, regulate the construction and distribution of affordable
housing and earnestly do a good job in housing guarantee for low-income households.
Fifth, go on with real estate financial innovation. Real estate finance is an important part of
financial innovation. If we attributed sub-prime crisis to financial innovation, we will run the
risk of mistaking the phenomenon as the root cause. In recent years, real estate financial
innovation has made initial achievements through concerted efforts. We should summarize
experiences, continue to push ahead with financial innovation, improve the efficiency of
resources allocation, identify and diversify financial risks in the real estate sector so as to
promote the healthy development of the real estate financial market.