Great reporting from the Reference News into the government's new policy directive intended to dampen the housing market by discouraging people from taking mortgages on second homes. Under the new requirements a second-home mortgagee will be required to post a 40% down payment and meet a 10% interest rate in the future. The current requirement is 20% for 90 square meter or smaller properties and 30% for larger properties.

However the government has left a window big enough to drive a bank through, according to a Reference News investigation. First, the government said down payments and interest rates should be even higher for a third or fourth mortgage, but left commercial banks to determine how much higher. Fair enough I guess, as they are the ones taking on the risk, and they need to make some money from mortgages.

But the government also failed to define clearly what constituted a second mortgage; for instance does it apply to an individual or a family. According to the newspaper, the Beijing branch of China Merchants Bank defines it as the second mortgage for an individual, while the Jiangsu branch of the Bank of China defines it as the second mortgage within a family. The policy also neglected to say if the rule applied to those who had paid off a first mortgage.

Most banks in Shanghai, including the Big Four, Bank of Communications, Shanghai Pudong Development Bank, China Merchants Bank, and Industrial Bank, will announce their new rules later this week.

Not sure what the government is trying to achieve here. It clearly needs to allow its banks, many of which are now public or planning to list, to operate under commercial imperatives, but it also needs to take clear action when it says it wants to clamp down on property speculation and ensure affordable housing. I guess this gives it a get out clause - if the plan leads to unforseen consequences, it can blame the banks for not listening, or for listening too hard, whichever suits its purpose for whichever audience it is trying to woo at the time.

I guess its not easy ruling with an iron fist whilst trying to embrace free market sensibilities. But the old adage that the Emperor is far away and the mountains high is as convenient as it is frustrating for the mandarins in Beijing.