Have China’s biggest banks been banned from making further loans to property developers this year or not?

The answer isn’t just of interest to real estate developers and investors who hold their shares. Lending policy in this sector is a good indicator of how serious the Beijing government really is about slowing China’s economy.

Until very recently the betting was on “Not very.”  But on November 16 Chinese stocks plunged as investors changed their minds about the direction of government policy.

On November 15, a report from China Real Estate Business said that the four biggest state banks won’t issue new loans to developers for the rest of 2010. The newspaper noted that the banks had met their loan quotas for the year

A few hours later a story on Caixin Online reported that at least two of China’s big four banks, Agricultural Bank of China and China Construction Bank, had denied the report.

Bank stocks, which had dropped on the first report, rallied on the denial. Agricultural Bank of China, for example, rose 1.1%, reversing an earlier 1.5% decline.

To figure out what’s going on here you have to pay close attention to the exact language from the banks.

It is true that China’s big banks have used up their property loan quotes for 2010. In fact, on October’s numbers these banks are very close to using up their loan quotas for all kinds of loans for 2010.

Note carefully what the two banks told Caixin Online. A source from Agricultural Bank of China said that the bank had generally halted property loans but that the government had not imposed an administrative ban on property loans. “If there are good property projects, we will still lend in the fourth quarter,” a source at the bank told Caixin Online.  An official at China Construction Bank echoed those comments.

I think what we’re seeing here is banks that are waiting to see which way they will be told to jump. And that are protecting themselves from any shift in the policy winds.

If the People’s Bank does impose a ban on property loans, the banks can point to their self-imposed halt in loans as an example of their cooperation with the national government.

Absent an absolute government ban, however, the banks don’t want to rile property developers with power political connections (and who are a major source of future business.) If powerful and well-connected property developers come calling, the banks can grant loans on a case-by-case basis–if the developer is well connected enough.

It’s pretty clear from the numbers reported for October by China’s largest publicly traded property developer, China Vanke, that if there has been any official effort to slow the real estate market, it has been applied very unevenly so far. China Vanke reported record sales in October of 15.5 billion yuan. The company is on a pace to report sales revenue of 100 billion yuan by the end of the year.

In other words, I think looking backward even a month we see business as usual in China’s mixture of a command economy and a free market.

These days when a policy comes down from Beijing—such as the current “Slow real estate speculation”—the response isn’t “Yes, Comrade. Immediately. How high do you want me to jump?” but “How serious is the government?” And “Do you really want this to apply to the most connected companies in the market?”

Right now China’s stock markets say that that they don’t know what the government intends but that they’re worried Beijing just might be getting serious.