A battle is brewing between domestic and locally incorporated foreign banks over the housing loan business in China. On April 2, the first four locally incorporated foreign-funded banks-Citibank (China), the Hong Kong and Shanghai Banking Corp. (HSBC) (China), Standard Chartered (China) and Bank of East Asia (BEA) (China)-started operation. While they have been permitted to offer renminbi deposit and loan accounts for several weeks now, these banks are now gearing up to make a push in the housing loan business.

BEA, one of the new foreign arrivals, has just begun to offer housing loans to individuals in China. Based on a benchmark interest rate of 7.11 percent for five-year and over loans, the bank may offer discounts of up to 15 percent to clients with good credit, with a preferential interest rate standing at 6.043 percent. While Citibank has not yet announced its policies for this market, HSBC and Standard Chartered have been making concerted efforts to prepare for the housing loan business. Previously, foreign banks in Beijing could only grant yuan loans to foreign passport holders and permanent residents of Hong Kong, Macao and Taiwan.

Housing loans, with low risk but high profits, have been the largest source of profit for Chinese banks for a long time. At present, domestic commercial banks are highly dependent on revenue from differences between lending and saving rates, with housing loans accounting for as much as 90 percent of their credit business.

Statistics from the China Banking Regulatory Commission showed that by the end of 2006, the balance of personal housing loans nationwide had surpassed 2 trillion yuan. From 1998 to 2005, the balance of personal housing loans in China grew nearly 43 times. With their 4-percent net interest difference in loans of five years and above, housing loans have brought handsome profits to domestic banks, profits coveted by the foreign banks now entering the market.

A study conducted by Pricewaterhouse-Coopers indicated that among the 35 surveyed foreign-funded banks, 12 intend to provide personal housing loans for individuals after China opens its financial market to foreign banks. On the list of new businesses foreign banks plan to launch in the next three years, housing loans rank among the highest.

Tan Ruyong, from the Research Center for Modern Finance at Shanghai University, stated that the demand for housing among the young is quite vigorous, with more than 90 percent of their consumption credit concentrated on housing loans.

In Tan's opinion, housing loans have comparatively low risk for personal loans, with the rate of non-performing loans only accounting for 2-3 per thousand. As housing prices continue to rise, foreign banks will go all out for the housing loan business. "The opening of China's housing loan market to foreign-funded banks gives the Chinese people more choices, something which is more acceptable among the young," said Tan. "At the same time, this will trigger competition over housing loans between Chinese and foreign banks."

Service is vital

"I heard that foreign banks can offer housing loans with low interest rates," said Deng Xiao, a software engineer who is considering the purchase of a home. "The highest rate is only 5 percent and it can be as low as 4.5 percent, 3 percentage points lower than housing loans by Chinese banks."

Deng was delighted to hear that foreign banks are able to provide housing loans for Chinese individuals, especially because of the favorable policies and interest rates. "To buy a house, we must borrow at least 300,000 yuan," said Deng. "With the present interest rate of 7.11 percent, the interest we must eventually pay will surpass 100,000 yuan. So a bank that can offer the lowest interest rate is the one we will choose!"

However, Chinese citizens seeking loans from foreign banks should not get too excited. The rumors are not really true-at least not yet.

Li Wei, who works for BEA's Beijing branch, told Beijing Review that housing loans with a 5-percent interest rate, figured in terms of Hong Kong dollars or U.S. dollars, are only available to foreign passport holders and permanent residents of Hong Kong, Macao and Taiwan, as well as Chinese citizens with the right of permanent residence in foreign countries. Residents of the Chinese mainland cannot currently enjoy these preferential interest rates.

Fears that foreign-funded banks will launch a "price war" over housing loans are unfounded. A service war is more likely.

At present, the benchmark interest rate for housing loans of five years or above is 7.11 percent. Commercial banks can implement interest rates with fluctuations of 15 percent, hence the most favorable interest rate would be 6.04 percent. Since all banks-Chinese-funded or foreign-funded-will try to offer the most favorable interest rate, banks providing the best service are the ones that can win the clients.