The real estate price of shanghai for instance

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Unformatted text preview: l possibly fall on the government. Actually, a flow of new bad debt is piling up, though old bad debt hasn’t been fully resolved. China’s economy is experiencing a new round of investment heat during recent years. According to National Bureau of Statistics, the fixed asset investment grew by 27.7% from 2002 to 2003 and 26.6% from 2003 to 2004. The investment in real estate grew even more faster. As indicated in Figure 4, the investment in real estate increased by 30.3% from RMB 779.09 billion in 2002 to RMB 1,015.38 billion in 2003 and increased by 29.6% from RMB 1,015.38 billion in 2003 to RMB 1,315.83 billion. . Due to the strong demand and speculation activities, the price of real estate soared tremendously, which increased by 4.8 percent in 2003 and 9.7 percent in 2004. The growth rate of real estate price is even daunting, especially in the coastal cities. The real estate price of Shanghai, for instance, increased by 20.1 percent in 2003 and 15.9 percent in 2004. During this round of investment wave, the loan increased tremendously in China between 2002 and 2004, especially in some highly risky sectors, such as the iron and steel, aluminum, cement, and real estate in particular. Property lending has also been one of the fastest-growing categories at many Chinese banks. For instance, about 25% of the loan portfolio of China Construction Bank is tied to the highly risky real estate market. Chinese banks commonly lend the property loan by first funding a real estate development fully, such as an apartment tower or housing complex, then holding on to the property and extending more loans by providing residential mortgages as well. This kind of practice is fine when values keep rising. However, banks usually don’t exactly know the credit quality of both developers and individual borrowers. If the bubble of real estate breaks Figure�4,�Investment�of�Real�Estate,�2000-2004 (RMB billion) 1400 1315.83 1200 1015.38 1000 779.09 800 600 634.41 498.41 400 200 0 2000 2001 Source: China Statistical Year Book, 2005 2002 2003 2004 研 究 所 年 報 150 up and the property prices falls, the property loan will become NPLs. To prevent Chinese economy from overheating like that in the early 1990s, the government has initiated the macroeconomic control measures to cool down the economy, especially in the field of real estate. To control the credit expansion, PBoC has raised the deposit reserves requirement twice, initiated a tired reserve requirement system tied to each bank’s capital adequacy ratio, and imposed credit controls on certain overheated sectors. As low interest rates, both for house developers and buyers, were regarded as a main reason for the overheating, on October 28, 2004, the PBOC raised the benchmark rate for one-year RMB loans by 0.27% from 5.31% to 5.58%, and the benchmark one-year RMB deposit rate by 0.27% from 1.98% to 2.25%. This is the first interest rate hike in nine years14. The People’s Bank of China (PBoC) increased its benchmark one-year lending rate by 27 basis points to 6.12%...
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