The central bank's move to tighten controls over loans to the real estate industry will be greatly conducive to the safety of the banking sector.

It is a much-needed move even though it may subdue economic growth to a degree.

A circular issued by the People's Bank of China last month demanded that commercial banks clear up irregularities in real estate developers' borrowing activities to reduce developers' over reliance on banking loans. The central bank also suggested that the commercial banks be more strict in lending to home buyers who are purchasing more than one home.

The central bank is well aware that the real estate industry has been a pillar of economic growth since 1998, so it is not intent on abating it.

But the circular is a clear indication that the central bank believes the real estate sector is overheated and financial risks in the sector need to be addressed.

It believes real estate developers are injecting too much funding into luxury houses. But the really promising market is for low-cost homes for salary earners.

The central bank wants to see structural changes occurring.

The restrictive move could prompt part of funds in the industry to leave as the reins tighten, which in turn may lead to a slower growth of the industry and have a negative impact on economic growth.

But compared with risks that the sector is inflicting to banks, such loss is insignificant.

The danger mainly lies in the sales of houses. If developers cannot sell their homes, they will not be able to repay their loans.

It would also be problematic if home buyers cannot repay their borrowings. Both will add to the banks' bad loans.

Deterioration of the banking sector's health will shake the economy's long-term growth.

Some analysts believe the central bank's action against the real estate sector is also an indication that it intends to reduce the general money supply to cool down the economy.

The central bank did not openly say it has such intention. But if it does, it would be inappropriate.

Deflationary pressure is still there and we are not seeing real signs for inflation.

The price index did recover somewhat in the first quarter of the year, but it was mainly caused by increases in the price of oil, which has been receding since the end of the Iraq War.

Fixed asset investment led by government spending on infrastructure was a major force driving the economy in the first quarter. Exports also made some contribution.

However, during the period, consumption growth stood at a mediocre 9.2 per cent, which showed that demand was still not strong enough.

The central bank needs to closely observe economic statistics for the second quarter to decide what do to next.

The author is an analyst with the brokerage Beijing Securities

Close

Today's Top News		Top Business News
+The next great leap after Shenzhou V ( 2003-10-21) +Hu calls for balanced development ( 2003-10-21) +Report: SARS not airborne virus ( 2003-10-21) +Japan urged to resolve weapons issue ( 2003-10-21) +Int'l AIDS group opens Beijing office ( 2003-10-21)		+Home-appliance giants want wheels ( 2003-10-21) +Exchange-rate reform under study ( 2003-10-21) +Health insurance sector called for ( 2003-10-21) +SanDisk teams up to open outlets ( 2003-10-21) +Housing prices start to sag in Shanghai ( 2003-10-21)