Are China's Home Lenders Pumping Up A Bubble?

Tina Zhao is about to become the proud owner of her first apartment, a small-but-comfortable, 500-square-feet toehold near Beijing's West Railway station. The 25-year-old has already plunked down a $12,000 downpayment for the place, and now she's waiting for approval of an $18,000, 20-year mortgage from China's Minsheng Bank. While loan applicants in some countries might be biting their nails at this point, Zhao says she has been assured that she'll get the money for her $30,000 apartment in less than a month. Best of all, the only information the bank asked for was her salary, with no credit check. "It's very easy, there was no strict procedure for this at all," says Zhao, who works as an engineer at a local electronics company.

That's just the sort of loose credit that's fueling much of China's current boom -- and worrying Chinese authorities. As home-buyers such as Zhao jump into the market, mortgages issued by China's banks have surged, growing more than 40% last year, to $142 billion. The easy money may be inflating a housing bubble in showcase cities such as Beijing and Shanghai: Residential prices nationwide are up by 7.7% so far this year, and in red-hot Shanghai they grew by 25% in 2003. And a flood of Taiwanese, Hong Kongers, and Japanese expatriates are buying houses and apartments as both investments and residences. Investment in real estate grew by 41% in the first quarter, says one senior government official.

So over the past 12 months, China has pushed a raft of new measures to rein in the galloping residential real estate sector -- particularly the high end. There's a new rule requiring a 30% downpayment on homes, up from 20%. And officials in Beijing and Shanghai have ended tax breaks for purchasers of luxury properties. They are also pressuring bank officials to better investigate loan applicants and are boosting transparency by requiring developers to publish information on sales and prices. And they have banned the resale of properties before their new owners have even taken possession -- a favorite maneuver of speculators. If Chinese authorities "can reduce the amount of speculative investment, they can control the growth in prices," says Joseph Zimny, director of New Choice Mortgage Services Ltd., a Shanghai consultancy.

Tales of loose lending, however, abound. The developer of a newly finished apartment complex in Guangdong province wanted to raise some additional credit from one of China's banks. At first the local bank manager wouldn't pony up more cash because the developer had already sold all the apartments and had no collateral to offer. So the chairman of the housing company asked a bunch of his friends to pretend they owned apartments -- and say they were willing to offer them as collateral. The bank never asked to see the nonexistent title deeds and happily handed over the money. "When the banks are tight with money, they are very tight, but there are always ways around that," says a former executive of the developer who did not wish to be named.

A lot of parties have a strong interest in seeing that the boom keeps booming and loans continue to be made. Bank managers' salaries today are often based on their ability to reduce the percentage of non-performing loans -- usually accomplished by simply issuing new loans and hoping they don't go bad. And China has some 35,000 property developers, most of them small and poorly regulated, who are eager to make a yuan wherever they can. Last year developers brought almost 20 million square meters of new residential space to the market in Beijing, and Shanghai built even more than that, estimates James Hawkey, chief representative of Cushman & Wakefield in Beijing. Even with the new regulations, "the property markets are not geared up to react to the early warning signs of overdevelopment, so supply is bound to overshoot when demand has already faded," he says. So far, China's appetite for real estate hasn't slackened, and the residential vacancy rate remains low. The question is whether the government can bring the sector in for a soft landing, or whether it will soar so high that it eventually flames out.

By Dexter Roberts in Beijing, with Frederik Balfour in Shanghai

— With assistance by Frederik Balfour

    Before it's here, it's on the Bloomberg Terminal.