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China casts fearful eye at subprime
Real estate news By Niu Zhijing and Zhou Jiangong
Oct 17, 2007
In the wake of the US subprime crisis, China's central bank and its banking watchdogs have ordered commercial banks to tighten loans to home buyers and property developers, apparently in fear that a possible downturn of the currently bullish housing market would bring about similar financial turmoil in the country. And in a move to further tighten bank lending to help cool down the economy in general, the central bank on Saturday raised the proportion of deposits that commercial banks must hold in reserve by another half percentage point. This is the eighth time the central bank raises the deposit reserve rate this year.
The latest increase of the deposit reserve ratio, which will take effect on October 25, brings the ratio for commercial banks to 13% - matching the record rate that was in effect from September 1988 to March 1998. The credit-tightening moves are also seen as a new effort to help cool down the housing market. But considering all the other measures the government has taken so far, whether the latest will prove effective is doubtful. Analysts say housing prices are unlikely to go down soon as demand still far exceeds supply. At the end of last month, just before the October 1 National Day golden-week holiday, the People's Bank of China (PBoC), the country's central bank, and the China Banking Regulatory Commission (CBRC) jointly issued new regulations requiring commercial banks to raise their threshold for loans to home buyers and property developers.
According to the new regulation, the minimum down-payment required for mortgage loans to first home buyers must be no less than 20% of the total price of the premises for housing smaller than 90 square meters and no less than 30% for those bigger than 90 square meters. To qualify for mortgage loans, second home buyers are required to make at least a 40% down payment. And they will also have to pay higher interest rates. For them, the interest rate should not be lower than 1.1 times the benchmark lending rate. The current five-year benchmark lending rate is 7.83%. And commercial banks are required to examine the repayment capability of potential loan borrowers. For the first time, the regulations specifically stipulate that monthly installments on a mortgage loan must not exceed 50% of the monthly income of a borrower.
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