SINGAPORE (EDGEPROP) - China's property market was abuzz last week after a photo distributed online showed a bank letter demanding early repayment of a personal loan of nearly 300 million yuan (US$46 million).

The letter, issued by the Shanghai branch of a Chinese bank, requested the full repayment of the principal loan and the interest by the end of March "because the borrower failed to fulfil the purpose of the debt according to the loan agreement."

The notification letter was posted online on Wednesday and had been roughly edited to obscure the name of the borrower, the bank as well as the loan reference number.

At the same time, Beijing Business Today, a state-backed newspaper, cited unnamed industry sources as saying that Beijing-based banks have stated they are following strict compliance orders from regulators to demand early repayment of all loans flowing into the property market in violation of regulations.

In addition, the official Nanfang Daily reported that several banks in Guangdong have restructured in advance their lending suspected of being used illegally to fund property purchases and have terminated the credit lines with customers determined to be using loan proceeds illegally to prevent any embezzlement of funds.

The media reports come amid efforts by the Chinese government to cool down property price growth in recent years without going overboard and damaging one of the major pillars of the domestic economy.

The Chinese government has been promising since last year to help small and medium-sized businesses amid the outbreak of coronavirus, with additional liquidity released into the banking system, but it had already been reported that in some cases the financing was being obtained by dummy shell corporations and then used illegally for real estate investments.

Both central and local governments have taken a number of steps to curb the property market, including imposing limits on who can buy properties, the minimum down payment amount, the amount prospective buyers can borrow, ceilings on the amount that banks can lend for the purposes of real estate, and the so-called three red lines policy which caps the debt that large property developers' can accumulate.

China's top financial regulator, Guo Shuqing, said earlier this month that asset bubbles would continue to be a concern this year, calling the surge in real estate prices the largest "grey rhino" - a known risk which has not been adequately addressed - in the Chinese economy.

Another top policymaker, Yang Weimin, also criticised high property prices ahead of the National People's Congress.

Official data showed that outstanding household borrowing at the end of 2020 stood at 63.19 trillion yuan (US$9.7 trillion), the equivalent of 62 per cent of Chinese gross domestic product, but it remains unknown how much credit from household borrowing has illegally flowed into the property market.

Included in that total, household operating loans were 13.62 trillion yuan, up 20 per cent from a year earlier, faster than the growth of housing loans, but Chinese media have reported that many personal loans are in fact disguised as operating loans for companies but used for property investments.

Measures by authorities to cool down the housing market, coupled with the impact of the coronavirus, have caused real estate asset prices to slow markedly, particularly in relation to overall stock market performance.

Further measures on real estate lending are expected to come from the resumption of the government's deleveraging campaign to reduce debt and financial risks.

But policymakers also want to ensure the housing bubble does not burst, leading to a sharp market price correction and a downturn to the economy, analysts said.

Local authorities depend on income from land sales and so have strong incentives to artificially sustain property prices and avoid a collapse caused by market forces.

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Thus, they may feel housing price inflation has been dampened enough, suggesting a possible bottoming out of the property market in the near future, analysts added.

Joanna Davies, analyst at Fathom Consulting, wrote in a recent report that one tactic being used by authorities to put a floor under property prices was a deliberate policy to manipulate supply of residential and office building projects.

A key method to "mothball" properties during the construction phase of a project means extending the time it takes to complete them, and refusing to certify them as "vacant" even when they are complete, Davies said.

As a result, it now takes more than eight years to complete a project from start to finish, with the amount of floor space currently "under construction" in China mushrooming to 6.7 billion square meters (22 billion sq ft) and rising, Davies said.

These practices enable authorities to create a perceived shortage of "completed" housing coming into the market, and it enables the amount of new housing under construction to continue to rise, in an effort to avoid flooding the market with new units and driving down prices, Davies added.

"[But] the danger in this approach is that it merely reinforces the implicit guarantee [on housing prices] which has helped foster much of this risky behaviour in the first place," Davies said. "All the while, China's housing bubble is at increasing risk of bursting."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.