Further Strengthening the Administration of Real Property Credit Business Circular

(Issued by the People's Bank of China on June 5 2003.)

To all branches and business management departments of the People's Bank of China, all wholly State-owned commercial banks and share system commercial banks:

In order to further implement real property credit policies, control financial risks and promote sound development of real property financing, the People's Bank of China hereby issues this Circular on requirements for further strengthening the administration of real property credit businesses:

1. Strengthening Administration of Real Property Development Loans and Directing and Regulating the Utilization of Loans

Borrowers of real property development loans shall be real property developers that possess real property development qualifications, have a comparatively high credit standing and have no construction payments in arrears. Loans shall be used with an emphasis on supporting residential premises affordable by medium to low income families. Utilization of loans to finance the purchase of large household, large-sized and luxury commodity premises and villas shall be restricted appropriately. The extension of new loans to real property developers that have a high commodity premises vacancy rate and a high debt ratio must be strictly examined and specially monitored.

All commercial banks shall fully implement the Ministry of Construction, State Development Planning Commission, Ministry of Finance, Ministry of Land and Resources, People's Bank of China and State Administration of Taxation, Strengthening the Macro-economic Control of the Real Property Market and Promotion of the Sound Development of the Real Property Market Several Opinions (Jian Zhu Fang [2002] No.217), and shall not grant any kind of loan for any project for which a leasehold certificate, a construction land planning permit, a construction project planning permit or a construction work commencement permit has not been obtained.

Commercial banks may only grant loans applied for by real property developers under the category of real property development loans. Granting loans under the category of real property development working capital loans or any other category of loans is prohibited. For non-real property development loans already granted to a real property developer, commercial banks shall follow the principle of sole recovery but shall not grant any more loans. A real property developer applying for a bank loan must have its own funds (owner's equity interest) in an amount not less than 30% of the total investment of the development project concerned.

A real property loan granted by a commercial bank may only be utilized for developing real property projects in the same locality as the commercial bank. The utilization of real property loans in other localities is strictly prohibited.

2. Strict Control on Granting of Land Reserve Loans

All commercial banks shall regulate the administration of loans to governmental land reserve organizations, and shall be prudent in granting such loans prior to the promulgation of the Administration of the Loans to Land Reserve Organizations Procedures. Any loan granted to a land reserve organization shall be a mortgage loan and the amount shall not exceed 70% of the assessed value of the land to be acquired. The term of such loans shall be no longer than two years.

Commercial banks shall not grant loans to real property developers to finance payment for leasehold fees.

3. Regulating the Use of Working Capital Loans by Construction Enterprises

Commercial banks shall strictly prevent construction enterprises from utilizing bank loans for making advance payments in respect of real property development projects. A construction enterprise acting as a contractor for a real property project may only use its working capital loan funds for purchase of essential construction equipment (such as cranes, excavators and bulldozers). Where an enterprise misappropriates the working capital loan funds, the granting bank must recover the misappropriated funds within a prescribed period and notify all other local commercial banks of such illegal act of the enterprise, and all other commercial banks shall be prohibited from providing corresponding credit support to such enterprise. Commercial banks shall restrict lending to construction enterprises undertaking real property construction projects whose own funds are inadequate or whose accounts receivable are of a large amount.

4. Strengthening Administration of Individual Housing Loans, Putting Emphasis on Support to the Need of Medium and Low Income Families to Purchase Residential Premises

Commercial banks shall further expand their individual housing loan clientele to expand the beneficiary group to residential premises loans. To lessen unnecessary interest payment burdens on borrowers, commercial banks may grant individual housing loans only to individuals purchasing residential premises, the main structures of which have been topped out. A borrower applying for an individual housing loan for the purchase of the first residential unit for his/her own use shall make a down-payment equivalent to 20% of the total price of the unit to be purchased. The down-payment shall be appropriately increased for purchase of subsequent residential unit(s).

A commercial bank shall input details of individual housing loans that it grants into the credit record and inquiry system maintained at the local branch of the People's Bank of China. Such details shall include the amount of the loan granted to each borrower, the term of the loan and the identification card numbers of the borrower and his or her spouse. A commercial bank shall, before granting an individual housing loan, check the information in the credit record and inquiry system.

5. Intensifying Administration of Individual Commercial Unit Loans

The loan-to-value ratio of an individual commercial unit loan applied for by a borrower shall not exceed 60%, and the term of such loan shall not exceed 10 years. A commercial unit that is the subject of such a loan shall be a completed unit that has been accepted upon inspection. A commercial bank shall process a loan application to finance the purchase of a unit for both residential and commercial purposes in accordance with the provisions on administration of individual commercial unit loans.

6. Fully Utilizing Interest Rate, as a Lever to Adjust Demand for Individual Housing Loans

When a borrower applies for an individual housing loan to finance the purchase of a residential unit under the housing reform scheme or his or her first residential unit for self use (excluding luxury commodity premises and villas), a commercial bank shall apply the interest rate for individual housing loans published by the People's Bank of China (which must not be a floating rate). When a borrower purchases a luxury commodity premises, villa, commercial unit or subsequent residential unit, a commercial bank shall apply the current interest rate for regular loans with same terms and conditions as published by the People's Bank of China.

7. Strengthening Administration of the Granting of Entrustment Loans in Respect of Individual Housing Common Reserve

All commercial banks shall strictly implement the relevant provisions of the People's Bank of China, Strengthening the Administration of Credit Business for Housing Common Reserve Circular (Yin Fa [2002] No.247), strengthen management of accounts, maintain good relationships between parties to the entrustment and promptly rectify any act that violates relevant provisions. The business of providing housing entrustment loans shall be limited to individual housing common reserve entrustment loans. Commercial banks shall not grant entrustment loans supported by other housing reform funds (including proceeds of housing sales, housing subsidies and residential housing maintenance funds).

8. Strengthening the Administration of Real Property Credit Business

Branches of the People's Bank of China shall devise a system of real property credit business analysis in order to follow up, investigate and analyze real property credit granted by commercial banks, and shall order a commercial bank that has breached any law or statute to rectify such breach within a prescribed period of time and impose administrative penalties in accordance with the law.

Branches and business administration departments of the People's Bank of China are required to forward this Circular to all city commercial banks and township and rural credit cooperatives within their jurisdiction.

1. Unofficial translation provided by Clifford Chance. All rights reserved.