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Mark O'Neill

Another bumper year is expected despite central bank  warnings of a surge in bad loans

The  People's Bank of China has warned Shanghai banks  to limit mortgage lending, after another boom year that brought profits for developers but misery for thousands of families unable to buy new homes.

Shanghai property prices rose by an average of 15.8 per cent last year - the highest of any major mainland city -  with an increase of 27.5 per cent for areas within the inner ring road, according to figures released by the city government on January 25.

The value of completed properties was 117.54 billion yuan, an increase of 30.4 per cent, with property sales reaching 226.38 billion yuan, up 58.9 per cent.

Growth at these levels triggered alarm bells  at the  central bank,  which  sent a team to Shanghai to investigate where the money was coming from to finance this boom.

The central bank team found that mainland financial institutions had provided 102.3 billion yuan to the property sector, an increase of 20.4 billion, or 25 per cent, over 2003. They warned that    banks must prepare for a steep rise in non-performing loans on  mortgages and to take steps to mitigate the moral hazard associated with the current mortgage system.

Macroeconomic measures announced by the central government in spring last year  targeted property as an overheated sector. But the measures failed to set out specific restrictions on loans to individual buyers.

Under guidelines adopted by Shanghai banks last year, the ceiling on loans for second-hand  flats is 60 per cent of the purchase price, and loans to the property sector cannot exceed 30 per cent of total loans.  Mortgages accounted for 48 per cent of the new medium and long-term loans last year.

Loans from Hong Kong banks are joining the flood of money into Shanghai property.

The housing  data show both the failure of  the central government's measures to slow down Shanghai's property boom and the city's increasing dependence on this sector as an engine of its economy.

Mayor Han Zheng,  in a speech to the city's people's congress last month, addressed this issue.

'Although the increases in the city's property prices have slowed, there are some districts where prices are still rising too fast,' Mr Han said. 'We must perfect control measures for the market, satisfy consumption, regulate investment and control speculation.'

He stopped short of  advocating price falls, saying Shanghai would try to increase housing supply,  especially for  the needy.  He also said relocation procedures for residents displaced by projects would be improved, with more openness.

Meanwhile, media reports said that  Chau Ching-ngai,  a Shanghai developer at the centre of a  land scandal in 2003, would be released from prison during the  Lunar New Year.

Chau, who had close links to  senior city government officials,  was sentenced to three years' jail in June last year for stock-market fraud and falsifying documents, but would be released early on medical grounds, they said.

His release and the fact that  he was not prosecuted over land transactions were a sign that the property market  was still largely sheltered from official reproach.

Shanghai expects another boom year for property,  delivering mixed blessings for its policymakers. With prices exceeding those in Beijing, the city has succeeded in marketing itself as the most desirable commercial place in the country.

According to official figures published last month,  the city accounted for 10 per cent of the country's total foreign investment at the end of last year. More than 15,573 foreigners from 112 countries applied for work permits in the city last year, up 40 per cent from 2003, with expatriates from Japan, the United States and South Korea  topping the list.

The foreign presence  helps fuel demand for upmarket commercial and residential property. The city is also a magnet for rich Chinese home-buyers.

Swelling property prices, however, increase the wealth gap and condemn thousands more families to a future in which they have no hope of  their own home.

A study by Yi Zhongli, a researcher at the Finance Research Institute of the China Academy of Social Sciences, found that the ratio between average income and property prices in Shanghai is higher than that of Hong Kong in 1997, just before the bubble burst.

A family with  a household income of 45,000 yuan a year would have to spend 14 years of their earnings to buy a flat of 80 square metres, against an adjusted ratio of 11 in Hong Kong in 1997.

Mr Yi said that 45,000 flats in the central urban area, amounting to five million square metres, were unoccupied, and that up to 60 per cent of flats in new housing areas in Pudong were empty.

'There are two classes of people in Shanghai. One is that of people on ordinary incomes who have lost the ability to buy an apartment. The other is the rich who have bought not only for themselves but also for investment.

'This is extremely dangerous. Probably, in the near future, the property market will collapse like the car market,' he said.



Property boom curbs fail in Shanghai