China is unlikely to further tighten
its grip on the real estate industry as previous policy measures
are now kicking in, predicted Citigroup in a report on
Wednesday.
As a key driver of the world's fourth largest economy, China's
housing sector has experienced a spectacular run in the past few
years, prompting concerns of bubbles. If and when they burst will
spell trouble for banks - the most important funding source for
developers - and the overall economy.
That is part of the reason why the
central bank hiked interest rates six times and raised the bank
reserve requirement 11 times since the start of 2007. In addition,
regulators told banks to cut back on loans to property developers
and demand buyers of second apartments to pay a higher down payment
and a higher interest rate.
These measures have produced appreciable results, indicated by
frequent reports on housing price drops in some big cities,
especially in Shenzhen and Guangzhou, both in South China's
Guangdong Province.
"Overly tightening and a slump in
housing prices will bring about negative effects on China's banking
system and the broader economy," Citigroup said in its report.
Independent economist Andie Xie
agreed. "Many firms are using land as collateral when borrowing
from banks. However, land prices will drop," he said, urging
investors to think twice before buying bank shares.
Xie's concerns may partly explain the poor performance of bank
shares in the mainland equity market, with the biggest lender,
Industrial and Commercial Bank of China losing more than 20 percent
in half a month.
On Wednesday, all banks closed in negative territory. Industrial
Bank plunged 8 percent, followed by a 5.8 percent fall in China
Merchants Bank, the country's biggest credit card issuer.
Property shares hardly fared better. China Vanke, the country's
biggest listed property developer has lost more than 18 percent
since January 15.
The combined performances of bank and property shares weighed on
the broader equity market. The Shanghai Composite Index dived more
than 25 percent since January 14. In developed markets, a fall of
20 percent or more within a 12-month period can be called the start
of a bear market.
Such a big fluctuation does not surprise Andie Xie. "The A-share
market will face a major test this year, and will suffer from big
fluctuations," he told a recent financial forum.
He expected the market to fall further. "There are indications," he
said.
(China Daily January 31, 2008)
