In an effort to “take some of the air out of [China’s] property bubble,” the Chinese government will be tightening access to credit in the coming months[1]. The real estate and development industries in China are likely to suffer in the process as well as the wider economy in the region. Chinese banks have been extremely limited in the volume of real estate development they could fund for some time, but a uniquely Chinese investment vehicle, trust companies, had taken on much of the shortfall in real estate development lending. Now these “funnels” for funds from wealthy private individuals and companies will also be constrained when it comes to real estate lending. All deals will go through a regulator, allowing the China Banking Regulatory Commission (CBRC) to “quash a deal in advance,” say experts in the field.

In the first half of this year, Chinese trusts invested 207.8 billion yuan in the real estate sector despite regulatory restrictions on funding the housing and development industry[2]. The trusts were able to charge high interest rates since they have become, essentially, the only source for real estate development funding in the country. “Now we are not seeing anything less than 18 percent [interest rates]” on property loans from trust firms, said Jason Bedford, a financial advisory services manager at KPMG, an investing firm based in the United States. And while this has been great for investors, it also has centered the source of financing around these trusts. Now, “a crackdown by the banking regulator would result in an even bigger correction for the property sector,” said Jinsong Du, a Credit Suisse property analyst. The CBRC will not formally comment on whether or not its policies have changed regarding the trust sector.

Many economists are calling China one of the “only bright spots” in the global economy. Do you think that this will change if the Chinese government succeeds in bringing down construction and regulating its way out of the current real estate bubble?

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[1] http://online.wsj.com/article/SB10001424053111904480904576498061399333624.html

[2] http://www.reuters.com/article/2011/07/26/china-trust-property-idUSL3E7IQ1SN20110726