New Restrictions on China's Real Estate Lending
Video Transcript:
Video Transcript:
Three cities in coastal Chinese provinces announced they will impose stricter limits on real estate-related lending -- a move that may portend renewed nationwide restrictions on property markets in the near future. The ripple effects of more widespread controls would be felt not only within China, but also and perhaps more painfully by countries like Australia and Indonesia, whose economies depend on Chinese demand for commodities like iron ore and coal.
Real estate is arguably the single most important industrial sector in China today. Alone, it accounts for roughly 14 percent of the country's gross domestic product. And when you consider industries like steel, cement and coal -- all of which rely heavily on demand for energy and raw materials from housing construction -- property's share of gross domestic product rises to anywhere from 20 to 35 percent. Housing and other property construction alone accounts for 48 percent of Chinese steel consumption and in recent years has been by far the largest driver of state-led investment. Almost half of all lending under China's 2008-2009 stimulus package ended up in local Chinese property markets.
But the importance of the real estate sector goes beyond sheer economic impact. It is also a critical measure of fluctuations in the central government's policy outlook and strategic thinking. This is because China's property markets depend strongly on lending, and lending is almost completely controlled by major state-owned banks. When Beijing wants to stimulate the economy, it orders banks to relax controls on lending to home buyers, speculators and developers. Whenever property markets threaten to get out of control -- as happened in the second half of 2011 -- Beijing re-imposes controls.
The Feb. 19 announcements come after six months of relative resurgence in housing construction and sales following Beijing's decision to loosen controls and stimulate economic growth in the second half of 2012. In this sense, they reflect the Communist Party's ongoing struggle to balance the imperatives of growth and employment against the need for economic stability.
Beijing has proved capable of managing this balance, at least for now. But as central government policy cycles between growth and stability -- that is, between relaxation and restriction of controls -- the side effects of fluctuations in China's real estate sector ripple out through the region and globally. Tighter controls on lending to Chinese property developers means lower demand for all the materials those developers consume. And this directly affects the bottom lines of countries like Australia, Indonesia, South Africa and Brazil. For these countries, the assumption of continued Chinese demand for raw materials has become a fact of life.
2012 showed just how important China's real estate sector is for the global commodities trade, as fluctuations in global coal and iron ore prices ran parallel to changes in bank lending to Chinese developers and homebuyers. China's major suppliers have so far weathered these fluctuations without too much pain, but already there are signs of wariness among some of China's higher-cost suppliers, such as Australia. The last thing these countries need is another period of enforced slowdown in the Chinese real estate sector.
