The regulator has guided banks away from lending to developers since late 2009, we understand. However, unlike in 2008, credit is still getting through. In H1-2010, banks extended developers an additional CNY 435bn (USD 65bn) in financing, as Chart 24 shows. This is nothing like the credit famine the government imposed in 2008. A friend in the private equity business commented that this is likely a case of the government learning a lesson: when the developers were starved of financing last time, they stopped all construction, supply inevitably fell, and prices skyrocketed then when demand returned. This time, the authorities seem to be aiming to provide enough credit to support construction, but to suppress land speculation, force down land prices and squeeze developers that hoard land.

We hear that small and medium-sized developers have had the biggest problems in getting bank loans. In response, they have turned to trust companies for funds (see On the Ground, 14 July 2010, 'China - A lack of trust'). Trusts were able to raise large-scale funds from retail depositors, which allowed them to issue products which reached more than CNY 1bn in size. However, the bank regulator closed this avenue in late July, and now trust companies must once again rely on their traditional client base of wealthy individuals and issue products of only CNY 200-300mn in size. This will affect funding for developers - an increasing number of medium-sized firms will not be able to raise external finance. Rates on trust loans have risen to 15-20% for medium-sized developers and 10-15% for larger ones. Size matters in this environment; the large-scale developers are probably even enjoying the shake-out a bit.

Eoin Treacy's view These additional articles were also forwarded by subscribers and offer two rather different opinions on where Chinese property prices are headed:
Billionaire Who Grew Up With Mao Sees No Housing Bubble by William Mellor for Bloomberg

China Tells Banks to Stress Test for 60% Home-Price Drop also for Bloomberg.

There is little doubt that China's property market has bubble characteristics. However, the response from policy makers has been to actively combat this threat and to date they have been reasonably successful. The Chinese authorities share none of the Fed's hubris in claiming to be unable to identify a bubble until it bursts and are willing to accept short to medium-term pain rather than a medium to longer term threat of financial annihilation. This attitude is what we should seek from our representatives rather than the repeated bubble blowing of the last thirty years.

No one is naïve enough to believe that China's system of governance is without fault. The absence of capital gains or property tax fuels speculation and forces municipals to raise cash through land sales. Communism is inherently corrupt and the rule of law is applied in an arbitrary fashion. However, reform is underway in some of these areas and a number of cities are in the process of setting up property taxes, with a view to rolling out the system to the whole country. This will give the provinces more independence but should also help to reduce speculation in property.

Property prices could fall further but let's not forget that lower prices are the desired objective of the government's tightening. They have a large array of tools to employ once they have achieved their aims, not the least of which will be to roll back the raft of additional regulations they have implemented over the last year.