China Raises Mortgage Interest Rates, Down Payments

Sept. 28 (Bloomberg) -- China raised interest rates on some mortgages and increased minimum down payments in an effort to cool property prices that jumped almost 10 percent last month.

The rate on loans for second homes and on commercial real estate was pushed to at least 1.1 times ``benchmark'' rates that the People's Bank of China didn't specify in a statement late yesterday. Buyers will have to pay not less than 40 percent of a property's value as down payment, up from 30 percent.

The measures tighten controls in a market where the government is concerned that a surge in lending is creating a bubble, which would drive up bad loans should it collapse. Investment in real-estate development jumped 29 percent in the first eight months of this year. The statement also said the maximum mortgage for commercial property is half of its value, and the term can't exceed 10 years.

The decision by the central bank and the China Banking Regulatory Commission is ``to prevent credit risks and protect the borrower's repayment ability,'' according to the statement on the People's Bank of China Web site.

``It's clear they know they're behind the curve, in a hole, at risk of people taking more of their money out of bank deposits and going into other assets where there is already frothiness,'' said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington.

Until now, banks were barred from charging less than 90 percent of the benchmark rates for mortgages. Interest rates on loans for first homes are unchanged.

Monetary Policy

China raised its one-year lending rate for the fifth time this year on Sept. 14, to 7.29 percent. Those increases have failed to damp demand for property as China's economic growth raises incomes and people prefer fixed assets amid inflation at a 10-year high of 6.5 percent.

China Vanke Co., the nation's biggest listed property developer, led builders lower for a second day yesterday on anticipation of government moves to limit lending. It fell 0.61 yuan, or 2 percent, to 29.25, extending a 5.3 percent decline on Sept. 26.

Property prices in 70 of China's biggest cities rose 8.2 percent in August, the fastest since August 2005, when the National Development and Reform Commission began collecting the data.

`Nervousness'

The changes are ``a reflection of the central bank's anxiety and nervousness,'' said Lei Wang, co-manager of the $14.5 billion Thornburg International Value Fund in Santa Fe, New Mexico. ``They don't want to see prices go out of control.''

Wang's fund owns shares of Country Garden Holdings Co., China's most profitable property developer.

In the southern city of Shenzhen, which borders Hong Kong, average new home prices rose 18 percent in August, accelerating from 16 percent a month earlier. In Beijing, average home prices rose 14 percent last month.

In addition to one-year rates, the central bank sets benchmarks for longer durations. On Sept. 14, the benchmark rate for a five-year loan rose to 7.83 percent, from 7.56 percent.

China Construction Bank Corp. Chairman Guo Shuqing said this week the company, which controls about 22 percent of the nation's home-loan market, has reduced real-estate loans in areas where property prices have risen ``too much.''

Outstanding mortgage loans in China rose 20 percent in the first quarter to 2.4 trillion yuan ($319 billion), faster than the 16 percent growth in total loans. Non-performing mortgage advances totaled 19.2 billion yuan by the end of 2006, up from 18.4 billion yuan a year ago, according to the central bank.