Commercial banks should have more say in the market

At a meeting on May 12, Liu Shiyu, vice-governor of the People's Bank of China, urged the chiefs of some major commercial banks to accord preference to first-home buyers' demand for loans and charge them reasonable interest rates. But even after three weeks, the tight housing mortgage market has not shown any sign of easing. Instead, some commercial banks have raised their lending rates.

A recent survey conducted by a financial service company in 21 cities across the country shows that more than 40 percent commercial banks have charged first-home buyers 10 to 20 percent higher interest rates than the benchmark lending rate over the past half month. The rate is obviously higher than that imposed on homebuyers in April.

State-owned but independently run lenders have always followed the central bank's "window guidance", like the one on May 12, even if they are non-binding policy recommendations. The commercial banks' defiance of the central bank's latest guidance and the lack of appropriate response from the PBOC (or central bank), therefore, raise certain questions. Is this a presage of a change in financial management approach of China's top monetary regulator? Isn't the commercial banks' attitude toward individual housing loan seekers directly related to the chilly changes in the housing market over the past months?

After years of relentless macro regulations, China's high housing prices are finally showing some signs of stabilizing (perhaps even declining), with an increasing number of people believing this could be the turning point in the housing market. If such a sentiment dominates the market, it could possibly prompt people who bought houses on mortgage to stop repaying their loans and shift the risk resulting from declining housing prices to banks. And once this phenomenon spreads across the country, it would result in a financial catastrophe for lenders. Hence, as a normal risk-prevention move, commercial banks have adopted a cautious attitude toward the personal housing mortgage business.

Some banks, especially small ones, believe that raising mortgage rates is an effective way of deterring some individual borrowers from seeking loans or completely stopping such business to pre-empt financial risks. Given these conditions, it is not strange that the central bank's "window guidance" has failed to achieve the desired results.

As State-owned lenders that have to perform certain social responsibilities, the commercial banks have indeed harmed the interests of individual homebuyers by not following the central bank's "window guidance". But as commercial lenders, the banks have demonstrated their increased risk-prevention awareness, which needs to be appreciated. By unconditionally obeying the central bank's administrative mandates, commercial banks will have to sacrifice their independent and market-oriented decision-making rights, and possibly sit on huge amounts of bad debts, which have to be compensated by the government with taxpayers' money.