In September 2007, the Chinese government issued the Circular on Strengthening the Administration of Commercial Real Estate Loans ( Circular 359) in order to cool the overheated real estate market. Under Circular 359, purchasers acquiring their second or more residential property face higher down payments and loan interest rates than those purchasing their first residential property. This rule confused and caught the attention of the banking industry and public. In response, the government issued the Supplementary Circular of the People’s Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) on Strengthening the Administration of Commercial Real Estate Loans (, the Supplementary Notice) on December 5, 2007.
In order to determine the appropriate loan rate, the Supplementary Circular avoids confusion over how to determine whether the purchase of a piece of residential property is a borrower’s first purchase by specifying that a bank will consider the total amount of property owned by a borrower’s family members. “Family members” include the borrower, his or her spouse, and their children under eighteen.
For families that have already bought their first piece of residential property with a commercial housing loan, if the per capita footage of the property is below the local average, the borrower may enjoy a minimum down payment percentage and interest rate equivalent to those for a first-time purchase when taking out their second commercial housing loan. However, the borrower must provide footage information for his or her first residential property that has been certified by local real estate administration departments in accordance with the housing information filing system. To benefit from this regulation, the borrower must have already paid off the previous housing loan. In any other situation, if a family has already purchased a piece of residential property, higher interest rates will apply to their additional property purchases regardless of whether or not they have paid off the previous housing loan.
When applying for commercial housing loans to purchase their second or more residential property, borrowers who purchased their first residential property with housing provident funds will be treated as if they had purchased their first residential property with commercial housing loans. The PBOC and CBRC have explained that they do not intend to treat borrowing from housing provident funds differently because it incurs indebtedness just the same as borrowing commercial loans does. They both carry the same risk when there are major changes in the market.
The Supplementary Notice emphasizes that commercial banks must give notice to borrowers that they are required to provide true and accurate information, and no bank is allowed to process any loan application with false information or false certification. The PBOC declares that it is working to improve the PBOC’s credit information database on enterprises and individuals in connection with implementing Circular 359.