BEIJING -- China on Thursday ordered banks to cap loans to homeowners and property developers, the latest effort by the government to rein in a real estate bubble that has erupted in cities.
The directive, which applies only to Chinese lenders and not international banks operating in China, will go into force Friday.
The biggest banks, such as the Industrial and Commercial Bank of China and the China Construction Bank, will face a new cap of 32.5% of all outstanding loans that can be lent as home mortgages.
Medium-sized banks, such as China Merchants Bank, now have a 20% cap, while the smallest village and town banks will only be allowed to lend out 7.5%, according to a joint statement from the People's Bank of China and the China Banking and Insurance Regulatory Commission.
Loans to real estate companies will be limited to 40% for the top tier and 12.5% for the lowest, according to a five-tier ranking.
The new mechanism represents a reversal from the financial easing policies put in place to counter the fallout from the coronavirus outbreak. But given the fragile economic recovery, regulators are not expected to go as far as raising interest rates.
Banks whose balance of home-mortgage loans exceed the assigned caps as of Thursday have been told to lower the balance in phases. Those less than 2 points above the ceiling are given a two-year grace period to bring the level below the threshold. Banks surpassing their caps by 2 points or more are granted a four-year window.
This year, Chinese regulators eased up on financial controls so that banks can extend loans to small and midsized enterprises. As a result of that decision, a froth of money flowed into the real estate market, causing a bubble in urban condominium prices.
In places like Shenzhen, where newly built properties are subject to strict rules, such units have been resold almost immediately after bidding, according to a real estate industry source. Demand has boiled over to the point that some pre-owned units are fetching higher values on the market than new properties, the source added.
During this month's Central Economic Work Conference, a gathering of Communist Party leaders that plots the economic blueprint for the next year, the real estate bubble was painted as a "pronounced problem" that needed to be resolved.
Real estate is meant to be lived in, not a target for speculative investment, the conference concluded. Policymakers vowed to take appropriate measures in all cities to promote "stabilized growth" in property markets.
To that end, authorities have also cast a wary eye on real estate companies that have expanded their scale through leverage. The PBOC and other regulators plan to fully apply capital fundraising controls that limits new bank loans in proportion to the size of debt held by developers.
The financial market had been anticipating the PBOC, the central bank, to revise financial easing policies that have led to the real estate bubble. But the consumer price index for November undershot the year-earlier reading for the first time in approximately 11 years.
Although the Chinese economy has more or less normalized from the effect of the coronavirus, household income has been slow to recover, which has weakened resilience in consumption.
China's financial policy will carefully pursue the normalization route while keeping an eye on the recovery of the household sector and other parts of the economy. The measures concerning the property market will for the time being likely focus on stronger curbs on lending rather than tightening interest rates.