Hitting the Brakes

As Lending Heats Up Chinese Real Estate, Bankers Receive Stern Warning from Government


Last week, KnowledgeToday noted growing concern about a real estate bubble forming in China, where government figures show housing prices increased in October by 3.9% in 70 big and medium-sized cities. In September, prices in those markets rose 2.8%.


Today, the China Banking Regulatory Commission issued a stern warning to banks: Adhere strictly to capital requirements, or face sanctions. Banks that are now short of the previously lightly-enforced requirements were ordered to get into compliance by the end of December. Earlier this year, the commission increased the capital requirement to 10% of the value of a bank’s outstanding loans, and required that banks have credit provisions allowing them to quickly raise at least 150% of the value of bad loans.


Chinese banks lent more money in the first seven months of this year than in the two previous years combined, according to The New York Times. In the first half of the year, Chinese banks loaned $1.08 trillion for real estate and other purposes, equalling half of the country’s gross domestic product over that period, according to The Wall Street Journal.


Ironically, the lending spree was encouraged by the government as part of its economic stimulus plan. Now the question may be whether the government pressure might once again be more effective than it intended. Wharton management professor Marshall W. Meyer last week said he worried that any government intervention, even if it is measured and gradual, “will signal to the rest of the world that Chinese growth will not pull us out of the recession.”

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