Loan Regulations Amid Signs of Abnormality in China's Real Estate Market...Urgent Debt Management Needed

Real Estate Sales Including Housing Surge 133% in January-February
Financial Authorities Restrict New Loans at Commercial Banks, Strict Penalties for Corporate Loan Misuse

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The People's Bank of China, the central bank, instructed commercial banks to restrain new loans after detecting abnormal signs in the real estate market, such as a 133% surge in new home sales prices over the two months from January to February.

Despite Guo Shuqing, Chairman (ministerial level) of the China Banking and Insurance Regulatory Commission, warning of overheating in the real estate market by labeling real estate-related loans as a 'gray rhinoceros' at the end of last year, the market continued to show signs of overheating, prompting the use of loan regulations as a measure.

On the 4th (local time), major foreign media reported that the People's Bank of China instructed commercial banks to maintain the amount of new mortgage loans in the first quarter of this year at a level similar to last year to address concerns about a real estate market bubble and to stabilize the financial market.

People's Bank of China (Photo by Baidu)

Mortgage loans increased by 72% year-on-year through February this year. In terms of amount, 1.5 trillion yuan (approximately 250 trillion Korean won) was loaned into the real estate market.

In this regard, foreign media analyzed that since the Chinese economy has recovered to pre-COVID-19 levels, Chinese authorities have shifted their policy direction from boosting economic growth rates to controlling credit risks.

Larry Hu, Macquarie's Chief China Economist, said, "Concerns about an economic downturn due to the (COVID-19) pandemic have disappeared," adding, "The top priority for the Chinese economy is to reduce the debt ratio."

In fact, the debt-to-GDP ratio in China averaged 251% from 2016 to 2019 but rose to 285% by the third quarter of last year.

Last year's economic stimulus measures by Chinese authorities steadily pushed up real estate prices, and with real estate investment sentiment recovering again early this year, real estate loans surged. Real estate investment in China increased by 38% year-on-year in January and February, and real estate-related loans rose by 14%, marking the highest level in seven years.

Following the People's Bank of China's loan regulation directive, loans by commercial banks are expected to decrease significantly.

Regarding real estate loan regulations, a banker based in Shanghai said, "Small banks, including foreign banks, will face significant pressure to drastically reduce new loans," adding, "Maintaining a certain ratio will not be easy."

Regarding loan regulations, Global Times reported that loan screening will become more stringent, including assessing borrowers' debt repayment ability. According to notices sent by the People's Bank of China and other Chinese financial authorities to commercial banks, banks must strengthen management of borrowers' qualifications and credit, loan terms, and collateral when issuing loans.

In particular, it was reported that companies tend to invest in real estate after obtaining loans for business purposes, and this practice has been strictly prohibited. Paper companies are the primary management targets. Loans are prohibited for companies established less than one year ago and for companies holding acquired company shares for less than one year. Separate orders were also given for risk management of medium- to long-term loans exceeding three years.

Additionally, loan flows will be monitored after issuance, and any loans diverted to real estate will be immediately recalled. Banks will also face legal liability if they arbitrarily adjust credit limits.

Meanwhile, there are forecasts that the loan regulations by Chinese financial authorities could significantly restrict the expansion capabilities of foreign banks within China. This runs counter to the Chinese leadership's pledge to allow foreign investors access to the financial market.

This content was produced with the assistance of AI translation services.