Caixin
Oct 09, 2016 07:43 PM

Central Bank Governor Hints at Credit Squeeze to Deflate Nation's Property Bubbles

(Washington) — The head of China's central bank said the country will put in place "certain controls over credit growth," signaling a squeeze on liquidity that has been blamed for the property sizzle in dozens of major cities across the country.

Zhou Xiaochuan made the comments at a meeting of the IMF board — the International Monetary and Financial Committee — on Saturday.

New loans in August reached 948 billion yuan ($142 billion), more than double the figure a month before, data from the People's Bank of China showed. Over 71 percent of the loans went to households, mainly to fund mortgages.

"China will use various policy instruments to keep banking liquidity at an adequate level and allow credit and total social financing to grow at a steady and moderate pace," Zhou said in a written statement published in connection with the meeting in Washington.

Investors armed with cheap credit have flocked to China's property market in recent months, and home prices in 70 major cities rose 7.5 percent in August compared with a year earlier, according to China's National Bureau of Statistics.

Zhou had warned earlier against the emergence of housing bubbles. Speaking at the G20 meeting of finance ministers and central bank governors in Washington on Thursday, Zhou said the government has already enacted policies to develop "a healthy property market."

About 20 Chinese cities tightened home purchasing requirements in late September to cool an overheated market, with some prohibiting property developers from selling homes to residents who don't have a local hukou, or residency registration, and to those who already own more than one home. Other cities have raised the minimum down payment required.

Zhou also proposed controlling credit growth to corporations by "lowering corporate leverage and dealing with piling debt through market-based approaches, such as debt restructuring, debt-to-equity swaps, securitization, and liquidation." This came after the IMF warned that the country's growing debt "posed risks to financial stability."

China's gap of credit to gross domestic product, taking into account loans to the private sector excluding financial institutions, was 30.1 as of March, according to the Bank for International Settlements, a governance body comprising representatives from central banks from around the world. China's gap was highest among all 43 economies monitored by the financial watchdog. A debt level above 10 signals a potential crisis, according to the agency.

China's economic downturn and overcapacity in certain heavy industries have resulted in a group of "zombie companies" that are struggling to survive and repay debt.

Zhou said that although the bad-loan ratio in the banking system has risen, the overall risks are "controllable" because banks have sufficient reserves to deal with them.

Contact reporter Coco Feng (renkefeng@caixin.com); editor Poornima Weerasekara (poornima@caixin.com)

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