China expects further rate hikes to cool property market

10:00, January 03, 2011      

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The new year may be tough on people who plan to buy homes and those who already bought homes using bank loans, as China is very likely to announce new interest rate hikes this year after two increases in 2010, which will add to the financial burdens of home buyers.

"I thought I could pay off the mortgage ahead of schedule. But it seems impossible for me now after the government raised interest rates by 25 basis points on Dec. 25," said Wu Jing, a female white collar worker employed at a foreign-funded enterprise in Beijing.

China raised its benchmark one-year lending and deposit rates to 5.81 percent and 2.75 percent, respectively, beginning on Dec. 25, 2010.

"The latest interest rate hike will add about 170 yuan (25.76 U.S. dollars) to my monthly payment," Wu said. She took out a one-million-yuan loan to buy a second home at the beginning of 2010.

The Christmas Day rate hike came after the government raised rates in October for the first time in more than two years to tame inflation and prevent asset bubbles.

Also, six times last year China ordered banks to set aside more money as reserves in a bid to control liquidity.

Further, the December hike will not be the last one in this cycle of interest rate increases, as the problem of excessive liquidity cannot be solved quickly in the world' s fastest-growing major economy, said Yu Yongding, a researcher at the Chinese Academy of Social Sciences.

Chinese banks extended 7.44 trillion yuan of loans in the first 11 months of 2010, just shy of the government' s annual target of 7.5 trillion yuan. Also, though shrinking from the previous month, the country' s trade surplus in November reached almost 23 billion U.S. dollars, with imports and exports both hitting record highs.

"The rise in bank lending, trade surplus and hot money inflows pumped more money into the economy, already awash with capital, prompting the government to take more measures to drain liquidity this year," Yu said.

Guo Tianyong, a professor with the Central University of Finance and Economics, said interest rate hikes would help control liquidity, curb soaring property prices and keep the real estate market stable, despite added pressure on the balance sheets of home buyers and developers.

"It will be more difficult for developers to secure loans after further interest rate hikes," said Lian Ping, chief economist at the Bank of Communications, China's fifth-largest lender.

China's property prices climbed 7.7 percent from one year earlier in November, the slowest pace in a year, according to data from the National Bureau of Statistics.

"If interest rates continue to rise in the first quarter of 2011, the government's efforts to cool the property market will show more noticeable effects in the second half," Lian said.

The rise in interest rates also prompted banks to adjust their lending structure. China Construction Bank (CCB), the country's second largest lender, said it would increase investment in the construction of affordable housing this year, while raising the threshold for commercial property developers to receive loans.

CCB has extended more than 20 billion yuan to support the building of affordable housing and individuals' purchases of such homes, vice president Zhu Xiaohuang said.

The bank's move was in line with the country's effort to increase the construction of affordable housing to 10 million units this year from 5.8 million units in 2010. It also reflected the country's shift to a prudent monetary policy in 2011 from a moderately loose stance adopted to buoy the economy during the financial crisis.

Further, Lian Ping said the government should ensure adequate capital supplies for new projects and emerging industries this year, despite its decision to tighten bank lending, in order to minimize the effect of reduced liquidity on the real economy.

Source: Xinhua
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