Heightened control on the real estate industry

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The Chinese authorities are making every effort to curb the housing market and maintain financial stability. Apart from cooling demands via mortgage and purchase controls on buyers, it also imposes regulations on developers like closing their fundraising channels and limiting their prices.

Chinese developers used to not only lend from regular banks, but also from shadow banking.
This fueled the rise of land prices and resulted in lands acquired at record prices. To stop developers from adding leverage, the regulators have taken several steps to control non-traditional sources of financing for the real estate industry. Property-related private equity investments with asset management plans have been suspended in cities with overheated housing markets. Private equity lending to developers for land acquisition, working capital loans without specific purposes and developers’ issuance of offshore notes were also banned. In addition, there have been scrutiny on trust companies in China, which are financial firms that have a flexible charter and combine elements of banks and asset managers. It has been heightened since some of them lend to developers for land purchases despite a ban on such lending by regulators. Currently, one can say that all legitimate financing channels other than regular banks have been closed.

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To rein in the rising home prices, some city governments have said to refuse to grant pre-sale permits to developers with selling price seeming to be excessively high, resulting in a sales slump in May. According to industry insiders, all new projects granted sale permits in Beijing this year do not sell above RMB 80,000 per sqm, leading to rumours that it is the unofficial price ceiling set by city officials. Developers are under pressure now since the unofficial red line means that they will make no profit or even experience losses. Therefore, some of them are slowing their pace of launching new projects and putting a pause on acquiring land. It will become a vicious cycle as less supply will lead to the rise of housing prices, meaning that control measures will worsen the efficiency of the market and in turn push up the price.

China real estate

The stricter controls will make the housing market more policy-driven. Moreover, it reduces apartment supply and as such, prices will not fall but remain at high levels given the pent-up demand. The authorities always use all available means to maintain financial stability but they are unable to bring the outcome they want. Yet, Vigers Research believes that the measures will be loosened if they dampen the market too much since the policy makers are facing the challenges of an economic slowdown. Therefore, they have to strike a balance between reining in financial risks and maintaining stable economic growth in order to achieve the growth target.

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