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An effective housing credit risk-prevention mechanism should be established in China as soon as possible as the national commercial housing vacancy rate increases.
Serving as a major engine propelling the national economy, China's real estate industry has maintained a stunning average annual growth rate of 25 percent in recent years.
As a traditionally capital-intensive industry, the housing sector is heavily reliant on bank loans, both for developers and house-buyers.
Currently in China, 20 to 30 percent of developers' investment comes from direct bank loans, while the same figure for the homebuyers stands above 60 percent.
At present, the combined bank loans owed by both developers and home owners account for about 10 percent of the total loans issued by the country's financial institutions.
Such heavily skewed lending to a single industry could, to a large extent, make financial institutions' operation risks subject to fluctuations in the housing market.
In recent years, the substantially increased urban residents' income and the corresponding adjustment in their consumption structure have translated into a soaring demand for housing apartments, which was also spurred by relevant supportive government policies.
However, the expanding demand remains insignificant compared to skyrocketing housing supply in the market, resulting in huge vacancies of commercial housing throughout the nation.
In July 2002, a total of 120 million square meters of commercial apartment floor space lay vacant, a scenario that could spell grave risks for the financial institutions.
The huge amount of vacant commercial apartments across the country has trapped a large amount of investment, of which nearly half is bank loans.
Though the bank loans are mortgage loans, the value of the mortgage - that of the apartments - is assessed at the time of issuing. However, when the housing supply exceeds demand in the real estate market, the value of the apartment will be reduced accordingly.
Under such circumstances, once the borrowers, either developers or housebuyers, default on their debt payments, it could incur tremendous losses for banks as they could not make up for the defaulted debts by the reduced-value mortgage.
At a time when the prospect of lending returns for other sectors remains murky, the real estate industry stands out as a bright spot for commercial banks. Housing credit, for example, is still one of the best business items favored by commercial banks.
When competition intensifies, banks often race to lower their criterion on lending in order to scramble for market shares, a move that could incur hidden risks for banks.
It is also hard for banks to monitor borrowers' financial balance sheets during such a long period, and once some unpredictable factors, such as income fluctuation and employment changes, affect the borrowers, they will be forced to default on their debts or simply be unable to pay it, therefore bringing losses to the banks.
In addition, individual housing credit usually exceeds 10 years, sometime lasting for several decades, while the majority of deposits in domestic banks are less than five years, which will greatly reduce the fluidity of banks' assets and thus would cost them better investment opportunities.
At the same time, the concentrated, mammoth lending in the real estate sector could probably strain commercial banks' assets and even seriously affect their payment capability.
Furthermore, with the increased marketization of interest rates, the financial risks brought about by the rate fluctuations will become more acute for commercial banks.
The current situation has made it imperative that an effective housing credit risk-prevention mechanism be set up as early as possible to minimize the financial risks.
Commercial banks should improve their internal management and standardize their operations.
Banks, for example, should conduct a thorough study of the real estate industry and take into account their own assets structure before deciding how to issue housing-related loans.
Drawing on successful practices from the United States and Japan, a national credit guarantee institution, specifically dedicated to providing credit guarantees to middle or low-income groups, should be set up. When the time is ripe, the government should encourage the establishment of such private firms.
Such moves have proved to be effective not only in helping ordinary families buy homes, but also significantly reducing the mortgage risks faced by banks.
Currently, debt payment pressure is still too high for middle and low-income groups. Under such conditions, the government could set up a special fund to subsidize their interest rates. Such a policy impetus could stimulate demand for houses and at the same time reduce the risks of forced default due to high interest.
As mentioned before, in a capital-intensive real estate industry, the introduction of an effective housing development financing mechanism is critical to the industry's healthy development.
To this end, the existing public housing fund system should be further improved to ensure stable and long-term capital support for the country's housing development.
And other financing channels could also be explored.
The establishment of an efficient nationwide individual credit evaluation system is also crucial to minimize banks' risks arising from credit loans.
The author is a researcher with the Economic Forecast Department of the State Information Center.
(China Daily March 29, 2003)
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