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Focus: Changes to real estate laws and policies in China

18 January 2010

In brief: The General Office of the PRC State Council, the China Banking Regulatory Commission and the PRC Ministry of Land and Resources have recently introduced new policies aimed at controlling the price of residential properties in China. Partner Campbell Davidson , Senior Associates Maggie Ma and Ross Keene and Consultant Wen Zhang look at these changes.

How does it affect you?

  • The policies introduced by the General Office of the State Council (the State Council) and the China Banking Regulatory Commission (the CBRC) aim to tighten the grant of mortgages to first home buyers and to buyers who intend to purchase second properties.
  • The Ministry of Land and Resources (MOLAR) has released a policy to limit the size of new residential land plots.
  • The policies implemented by the CBRC and MOLAR are also aimed at controlling speculation in the residential property market.

The State Council and the CBRC tighten mortgage lending policy

On 7 January 2010, the State Council released the Notice on Promoting the Steady and Healthy Development of the Real Estate Market (the Notice) which requires local governments to implement various measures to strengthen and improve control over the real estate market and to stabilise market expectations. As a result, new mortgage applications made to the four national banks – the Bank of China, the Industrial and Commercial Bank of China, the China Construction Bank and the Bank of Communications – are being scrutinised more closely and discounts on the standard mortgage interest rate are only being granted in limited circumstances.

Since late 2008, banks have been offering discounts to borrowers on mortgage interest rates to stimulate activity in the property market. Some analysts say the recent dramatic increase in property prices is largely due to this discounting policy.

The Notice issued by the State Council also stipulates that financial institutions must strictly manage loans for the purchase of second houses. Under the Notice, the down payment for the purchase of a house other than the first house must be at least 40 per cent of the property price and the loan rate must be strictly monitored against risks.

There had been rumours that the CBRC had already notified the banks to tighten policies on the granting of mortgages to home buyers after the surge in bank lending last year before the release of the Notice. Since the middle of 2009, banks have tightened their mortgage lending policies for buyers of second houses. The China Construction Bank has been the first bank to take action to tighten mortgage lending to first home buyers. Currently the bank will only give a 30 per cent discount on the standard mortgage interest rate to borrowers who have made a down payment of 40 per cent of the property price. The other three national banks have now followed this trend and will only offer a 30 per cent discount to borrowers who have made a down payment of 30 per cent for any purchase of a property that is 90 square metres or larger.

The banks are not expected to reverse these tightened mortgage lending policies in the near future and it is uncertain whether the CBRC will implement additional mortgage lending policies later this year.

MOLAR limits the size of residential land plots

MOLAR and the National Reform and Development Commission amended the Catalogue for Projects with Restricted Land Use (2006 edition) (the Amended Catalogue) on 10 November 2009. Under the Amended Catalogue, the maximum size of residential land plots to be made available to property developers will be limited to seven hectares in small towns, 14 hectares in mid-level cities, and 20 hectares (200,000 square metres) in large cities such as Shanghai, Beijing and Guangzhou. This is the first time MOLAR has set a limit on the size of residential land plots to be developed.

The effect of the Amended Catalogue is unclear at this stage. Statistics show that more than 10 land plots granted in Beijing this year have been larger than 20 hectares in size. In addition, media reports suggest it is possible that local authorities have circumvented the new policy by dividing large plots into smaller ones to comply with the size requirements under the Amended Catalogue.

Speculation by property developers

According to Government statistics, there is approximately 300 million square metres of land that was granted to private land developers between 2006 to 2008 but remains undeveloped. There are suspicions that developers have already accumulated sufficient land reserves to develop their existing projects and that these developers are holding the remainder of their land hoping to speculate on increases in land values. It appears that this withholding of land from the market has contributed to a surge in property prices, with residential land plots in Shanghai, Beijing and Guangzhou having sold for record high prices this year.

There are reports that the Government may take measures to combat 'land banking' and speculation by property developers, but to date no concrete measures have been announced.

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