Merchants in Wenzhou are abandoning black market bank loans, Yu Ran reports.

Months before the central government declared war on the “gray” money market, merchants in Wenzhou sensed the potential crackdown and rushed to sell off properties they’d acquired with loans from underground lenders.

The sell-off has sent property prices in Wenzhou’s secondary market tumbling by at least 10 percent since June. Property prices in the Zhejiang province boomtown soared by an average of 20 percent in each of the past three years.

Most Wenzhou residents can’t remember the last time they saw a decline in property prices.

Real estate agents in the city said they have been flooded with sales orders. “My clients are dumping their property holdings not only in Wenzhou, but also in other cities,” said Zhao Xiuqin, the sales manager at a local property agency. “It’s a stampede, like animals running for their lives from a wild bushfire.”

The figurative fire was apparently set by the government in reaction to growing public discontent about escalating property prices. Authorities introduced various measures to clamp down on excessive speculation, and a major thrust of those efforts involved tightening bank credit.

China’s year-on-year consumer price inflation reached 6.5 percent in July, the fastest pace in 37 months and well above the government’s 4 percent target for the year, adding to the problem. It eased to 6.2 percent in August, but government officials have hinted that the full-year target may not be met.

The People’s Bank of China (PBOC), the central bank, has increased interest rates three times this year, raising the one-year benchmark deposit rate to 3.5 percent and the one-year lending rate to 6.56 percent.

The bank also increased the reserve-requirement ratio for commercial lenders six times, pushing it to a record 21.5 percent.

The PBOC has reiterated its commitment to reining in the underground lending market that has been most active in Wenzhou.

“Cracking down on illegal underground banking is the current focus of the government to regulate the private financial market and get the risks of private lending under control,” said Vice-Premier Wang Qishan at the end of August.