The China Banking Regulatory Commission (CBRC) has issued another set of internal guidelines for banks in key cities to cease offering mortgage loans for the purchase of the third home of a household. Such guidelines should be seen as a further step by the Chinese government to implement tighter macro economic measures to curb lending in the property market to protect the banking sector from over-exposing itself to the risk in the property market. The market expects the Chinese government to formulate further restrictive laws, regulations and policies shortly to tighten control over the real estate sector and the banking sector.

CBRC, PRC's banking regulator, has reportedly ordered banks to stop offering mortgage loan for third homes in four key cities, i.e., Beijing, Shanghai, Shenzhen and Hangzhou. This is yet another action taken by the banking regulator to dampen down property price rises and more importantly to control the growing risk in the banking sector in the wake of the purported bubbles in the real estate sector. China has already implemented a tighter second-home mortgage policies since early this year.

The contents of such order relating to third-home mortgage have not been publicly announced and even bankers do not generally know much about the practical operations of the order. For example, the definition of third-home is still unclear. Before detailed guidance on the order is issued, the banks in the four cities have just simply suspended the processing of such mortgage applications. The order further confirms the determination of the central government to control speculative purchase in the property market. As part of the macro-economic polices of the central government in China, the control of the over-heated property market will reduce the risks of the banking sector and hopefully divert capital from the property market to investments in industries encouraged by the Chinese government such as in the hi-tech sector.

As an engine for the Chinese economic growth, real estate sector has been playing a very important role in the country’s economic growth in the past decade. Due to huge capital demands of the real estate sector, the banking sector is closely tied with the development of Chinese booming real estate sector. While people generally recognise the contributions made by these two sectors to the Chinese economic achievement, overreliance on this development model has already caused many problems which will have adverse impacts on the Chinese economic development in the longer term.

First of all, it is generally believed that there are bubbles in Chinese real estate market after so many years of property boom. Even middle class could not afford the current housing price in major cities, not to mention those with lesser earnings. High house price has also become an obstacle for the Chinese urbanisation process which is one of the important objectives of this country.

Secondly, Chinese government is very much concerned about the potential risk in the banking sector brought about by the bubbles of the real estate sector. It is feared that if the over-heated property market should face a correction, the banking sector may be badly hit and the Chinese economy will suffer a great blow. Banking stability is one of the top policy goals of the current Chinese government. Furthermore, in the longer term, the Chinese banking sector, backed by the Chinese government, has the aspiration to expand aboard and any damage to the sector will set back such aspiration for many years.

Last but not least, China is keen to provide support as much as possible to the high technological and innovative enterprises which, in the mind of the central government, will be the right economic engine for Chinese economic development in the future. The central government wants to divert capital from the real estate market to investments in the high technological and innovative enterprises.

Given the importance of the real estate market, there is no suggestion that the central government wants to do anything other than to nurture its growth. All the restrictive measures adopted so far, including the current order on banning third-home mortgage lending, have the same manifest intention to keep the growth of the real estate marketing in a healthy and orderly manner.

For inquiries related to this Legal Update, please contact:

Billy Ho (