The China Banking Regulatory Commission (CBRC) recently told domestic commercial banks to tighten their policies on granting loans, especially housing loans. But banks have been less than diligent in applying the new rules and a new round of restrictions is likely.

Commercial banks in Beijing have tightened their loan policies by raising the down payment for second homes to 60 percent of the purchase price. The move is in accordance with the "three requirements", concerning land management, property developers and house purchasers, announced by Liu Mingkang, head of the CBRC, at the Bo'ao Forum for Asia in Hainan. Liu also told the banks to deny loans to housing speculators.

But it is the endless expansion of mortgages that has lead to soaring prices and sales volumes. Home loans reached 2.46 trillion yuan (US$360.3 billion) in 2009, up 400 percent from the year before. In the first two months this year alone, the banks advanced 650 billion yuan in new loans.

The most effective way of squeezing the real estate bubble and cooling prices is to control the expansion of mortgage lending.

But will the banks stick to commitments to reducing lending? There are reasons to be doubtful.

First, mortgages loans are mid-to-long term loans, and exposure to risk is not apparent in the short term. Banks hold the title to the purchaser's house as security and do not see the business as hazardous.

Second, preferential policies, including low interest rates and low property taxes, have spurred a continuous rise in house prices since 1998 when China opened up its real estate market.

Third, mortgages are among the banks' top-end products and part of their core business.

Fourth, banks, especially state-owned banks, take the view that "we make the profit, the public take the risk". It is highly unlikely they will abide by the regulations without close supervision.

As house prices continue to skyrocket, it seems that tinkering with the rules on second home purchases will be far from enough.

First of all it is relatively easy for second home purchasers to disguise themselves as first-time buyers. In some case banks even help buyers find loopholes in the regulations. This partly explains how loans increased dramatically last year despite restrictions imposed by the CBRC.

Theoretically, the risk associated with mortgage lending would be reduced if down payments on second homes were raised. But regulations are of no use if banks and purchasers put fake information on mortgage contracts.

The housing bubble is largely the result of the huge expansion of the mortgage business.

The CBRC should keep a close check on personal loan reports issued by the banks and collect vital information on land financing, building financing and the interest rates of housing loans.

Only strict supervision will force the banks to adhere to rules regarding down payments and second home purchases. And new taxes should be devised to target the housing speculators.

The author Yi Xianrong is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.

(This post was first published in Chinese on April 18 and translated by Wu Jin.)

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