Sunday, July 27, 2008

China's banks told to tighten mortgages

Chinese officials and government economists have warned domestic banks to tighten their mortgage lending criteria after the US government's action to prop up its giant mortgage agencies, the oddly named Fannie Mae and Freddie Mac.

Liu Mingkang, China's top banking regulator, urged the country’s state-owned commercial banks to beware of risks in the real estate sector and ordered them to tighten loan approval processes.

Others among China's policy community have also begun to express concerns about the health of the country's banks amid signs a once-booming property sector has begun to slow.

Average house prices in China's 70 largest cities were up 10.2% from a year earlier by the end of June, according to official figures. But sales volumes in important cities, including Shanghai, Beijing and Shenzhen, have fallen precipitously in recent months. Some analysts fear steep price falls ahead.

A new word is needed to describe a situation where prices increase but sales go down. Stagflation does not cover it. Dropflation might just be better.

Yi Xianrong, a prominent economist at the China Academy of Social Sciences, said, 'If financial institutions of Freddie Mac and Fannie Mae's calibre could get into such a bad situation, then what does that mean for Chinese financial institutions?'

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