Thursday, March 17, 2005

Economy_China's central bank's new policy_Stick and Carrot to the commercial banks

China's central bank introduced new policies on mortgages and banking reserve, giving the banks both stick and carrot to balance between marco policy and corporation development.

The adjustment to preferential mortgage rates barred the banks from lowering interest rates on consumer housing loans to below 0.9 per cent of the PBOC's benchmark rates, which effectively raised the interest rate on a home loan with a maturity of five years to 5.51 percent -- or 90 percent of the base rate of 6.12 percent -- from the previous 5.31 percent.

The central bank said banks could also request a minimum downpayment on a home of 30 percent of its purchase price, up from 20 percent, in cities where property prices are rising quickly.

China daily reported
that the property price in 9 cities out of the total 31, increases more than 9 per cent last year, including Shanghai, and Nanjing in the east Jiangsu province.

The new rules could give banks flexibility in diffrentiating low-risk lending request from self-living and high-risk one from commercial buyings. Last year, New York times has reported that 40 per cent of the home property in Beijing are occupied with no people living.

Banks could decide the time to launch the new rules, when Sina today reported that Minsheng Bank and Guangdong development bank have already followed the rules to tighten the lending in cities like Beijing and Shanghai.

But investors worried that the new rules will affect the property market, with 150,000 new investment projects were launched last year, of which 20,000 starting up in December alone, reported AP.

"When the dust settles, China would face massive oversupply," Andy Xie, an economist at investment bank Morgan Stanley in Hong Kong, wrote in a report issued Thursday, AP reported.

The new rules also reduced the annual interest rate on excess bank reserves, which banks keep besides required reserves basically to meet payment needs, to 0.99 per cent from 1.62 per cent, China Daily reported. Part of the reason is the worry that the tightening lending policy will reduce banks' revenue capability, if the investors reduce their lendings on the property market.

The move is aimed more at pushing the banks to lend more to businesses, many of which -- particularly the smaller ones --, are feeling liquidity difficulties partly as a result of the ongoing macro management, said Wang Songqi, deputy director of the Finance Research Institute under the Chinese Academy of Social Sciences.

After the word "unexpected" from Premier Wen, the Central bank may bring more action in the same kind later.

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