Foreigners’ Disability to Provide Cheaper Housing Loans

Near the end of 2008, People’s Bank of China (PBC), which is China’s central bank, decreased the interest rate five times in about a hundred days. China’s central government took a series of measures to save the market. Those measures are acting as a stimulus to the economy and are also forcing the foreign-funded banks and investment banks in China to change their strategies of development.

According to the report from China Real Estate Business, since China’s government implemented control on its property market and macro-economy in 2007, the Chinese domestic-funded banks has been unable to accelerate the development of their retail businesses because of the tight money policy. However, the foreign-funded banks took this opportunity to grab the land of housing loans in China.

In October, the PBC published the new policy of housing loans, allowing the one who buys his first house can make a twenty-percent down payment and 30% discount of interest rate. This policy absolutely changes the situation of the competition between domestic- and foreign-funded banks.

Now, three months have passed. The new policy has generally been implemented in the domestic-funded banks. The foreign-funded banks, however, suffers “hard delivery” when implementing the new policy because of the restriction in capital cost.

Along with this is the most serious test for the foreign-funded banks since they entered the field of housing loans in China. “Presently we have no ability to compete with the domestic-funded banks in the increment housing loan business. Now we should try our best to retain our current customer. This is much more important for us at this time,” said Feng Ming (alias), manager of housing mortgage department of Citibank Beijing Branch.

Stranded Newly-added Businesses

“Some customers hopefully contact with us to consult about the home loans and feel disappointed after acquiringthat presently there is only 15% discount,” Feng Ming has received many calls like this and he has no idea when he can give a different and encouraging answer. “The latest housing loan policy is waiting for the examination and approval of our head office. We know nothing about the exact date, but we are sure that the discount can not be 30%.”

According to the introduction from Feng Ming, the 30% discount of the domestic-funded banks has attracted some former Citibank’s customers. Some of them have already chosen the domestic-funded banks while others hold the waiting and watching attitude. Only a few customers who pay attention to the brand are still loyal to Citibank.”

As a senior manager, Feng Ming certainly knows the reality of the market. He said: “I also hope that we can work out a plan having compromise between the cost and the market as soon as possible. The market waits for nobody. What customers care about is the brand service with the same discount rate.”

Most foreign-funded banks in China, including HSBC Bank and Bank of East Asia can also provide the housing loans with 15% discount in the interest rate, which is the most favorable one. Most of them are haunted by the problems of diversion of existing and potential customers and drastic decrease in the newly-added housing loan businesses.

The “hard delivery” of the new housing loan policy also demonstrates the hesitation of the foreign-funded banks in the capital cost and market development.

The foreign-funded banks got the qualification to set up the incorporated banks in Mainland China and provide the RMB service in the first half of 2007. They have shorter operation time, fewer branch networks and smaller amount of RMB reserves compared with the domestic-funded banks. So their capital cost is comparatively higher.

“Since the breakout of financial crisis, the scale of low-cost current deposit of the foreign-funded banks dropped in two straight months of October and November. If the lending cost is higher, it is hard for the foreign-funded banks to afford the interest rate as low as the one of the domestic-funded banks,” said Guo Tianyong, director of China Banking Research Center, Central University of Finance and Economics.

In that difficult situation, Standard Chartered Bank became the “first person to try tomatoes”. At the end of December 2008, Standard Chartered Bank published its new housing loan policy, becoming the first foreign-funded bank in China to publish the detailed rules of the housing loans. The director of Standard Chartered Bank said that the derailed rules of the housing loans are only applicable for Shanghai and Beijing. The one who buys his first ordinary house can make a twenty-percent down payment and 20% discount of interest rate. If he buys a non-ordinary house, he can enjoy an 18% discount in the interest rate. However, Standard Chartered Bank will still strictly stick to the present criterion for the housing loans of the second house.

At the same time, the relevant director of HSBC Beijing Branch gave out a message, saying that currently the 15% discount in the interest rate is still applicable, but the customers who make their first house purchasing can also enjoy the 30% discount. “They can enjoy the 30% discount if their houses meet those requirements: the area should not be over 140 square meters; the plot ratio should not be over 1.2 and the price of the same type should be lower than the ones in the same area.”

However, in the property experts’ opinions, the measures of Standard Chartered Bank and HSBC Bank are just a kind of consideration of the commercial benefits. “The 20% discount of Standard Chartered Bank can not change its adverse position in the competition with the Chinese domestic-funded banks. And the requirements of the 30% discount of HSBC Bank hurdle many customers,” said Guo Tianyong.

Efforts in Retaining Customers

The “hard delivery” of the new housing loan policy will result in the running-off of not only the new customers, but also the current customers.

Just as Feng Ming said, most foreign-funded banks put their devotions to preventing the running-off of the current customers after knowing the difficulty in getting new customers.

In China, the period near the Spring Festival is always a high season for people to change the banks where they borrow housing loans. The depression of China’s property market in 2008 aggravates the competition between the banks. With the loosening of the loan policies of the first house and second house, more and more China’s domestic-funded banks begin to make use of the new discount rate to grab each others’ customers through “switching mortgage”.

This is undoubtedly a lure for the current foreign-funded banks’ customers who can not enjoy the new discount rate. So the battle for retaining the customers is not so easy for those banks.

“The good news is that the deposit interest rate is lowered again on December 23. In January we will implement the new benchmark interest rate. This will reduce the stress of some customers in loan return and get rid of some customers’ impulsion to transfer the loans or return the loans in advance,” said Feng Ming.

The above-mentioned director of HSBC Bank said his company would make the most of the integrated service function of the brand. “We will further consummate the process of advanced loan returning and housing loan insurance. If the customers want to sell their houses, we will provide services during the period of sales.”

Besides, the key part of retaining customers-the new housing loan policy-is still being expected. “I hope it will come out in the first two months of 2009. Maybe the discount is not the most favorable one but at least it is more favorable than now,” said Feng Ming. However, Feng Ming rejected to make a forecast on the discount rate that Citibank will provide.

According to Guo Tianyong, if the foreign-funded banks want to change their adverse situation in the competition, they have to implement the same discount rate as the domestic-funded banks. “It is hard to win the market in China through pure brand value-added service.”