To help the locals finance their home purchases, banking sector reforms were undertaken. All commercial banks are now allowed to provide individual home mortgage lending, a vital move for the development of the property sector. The ceiling on housing loans has been lifted from 70% to 80% of the value of the property, while mortgage terms have been extended from 20 years to 30 years.

Moreover, China cut interest rates on February 21 2002 for the first time in more than two-and-a-half years. Mortgage rates fell by an average of 50 bps to 5.04 - 5.76%, while deposit rates dropped by 25 bps. With bank deposits yielding an unattractive rate of merely 0.72% per annum for current account deposits and 1.98% for one-year fixed-term deposits, more people are drawn to invest in property which may give them a better return in the long term. Housing loans, which currently accounts for more than 90% of all consumer lending in China, is forecast to grow at about 30% per annum over the next five years.

Besides commercial mortgages, employees also have access to the Housing Provident Fund, from which they can withdraw their fund contributions to make the downpayment on the purchase of a home. Established in 1996, both employers and employees contribute 6% to 8% of wages to the fund. The fund provides low interest mortgages at about 1% below the normal mortgage rate when a contributing employee decides to purchase a flat.

In Shanghai, the city government has also introduced preferential policies to boost the residential market. These include tax rebates which allow purchasers to offset the full cost of their home purchase against their personal income tax bill. The merger of the domestic and foreign housing markets in Shanghai has also enlarged the pool of potential buyers and at the same time injected greater liquidity into the market and provided buyers with a wider choice.

The Chinese government’s preferential policies are bringing local buyers out in strong numbers. Residential property sales rose by more than 30% in 2001, after a 47% surge in 2000. Prices also jumped 9% year-on-year to an average RMB2,100 (US$254) per sm in 2001, surpassing the 7% rise in 2000. In Shanghai and Beijing, average prices have gone up by 10 - 25% to as high as RMB4,738 (US$573) and RMB4,600 (US$556) per sm respectively.

The residential market in the major cities is booming as seen in the steady increase in demand for housing over the last three years. According to property consultants, the absorption ratio of new supply in 2001 is generally above 80%, but cities like Shanghai, Dalian and Tianjin record higher rates of above 90%. The take-up rate in Shenzhen was close to 100%, reflecting robust demand. The real estate sector in these major cities contributes significantly to their respective GDP, averaging 4% in Beijing and Guangzhou, and 5% in Shanghai, Shenzhen and Dalian.

Individual housing purchases accounted for 94% of the total purchases in 2001, compared to 75% in 1998. The locals form the bulk of the buyers, a trend reflecting the fast-growing incomes of the local population bolstered by the influx of FDIs and creation of jobs.

Encouraged by the rise in domestic confidence resulting from the strong economy, China’s entry into the WTO and China hosting the 2008 Olympics Games, real estate investment rose 30% year-on-year to RMB737.8 billion (US$89.1 billion) in 2001. In view of the fast-growing property market, the number of developers grew to close to 30,000 by 2001, most of which are small-scale developers.