取消商品房预售制度 (qǔxiāo shāngpǐnfáng yùshòu zhìdù): Canceling pre-sale system of commodity houses

South China's Guangdong province recently issued a document soliciting the opinions of local real estate enterprises and other agencies on the proposal to cancel the pre-sale system of commodity houses.

The pre-sale system was launched in 1994 and allows realty enterprises to sell their commodity houses before the construction is completed. In the beginning, the system helped develop the realty sector because real estate enterprises could get their investment back before the completion of a project and invest the amount in other projects.

But with the development of the realty market, the defects in the pre-sale system have become evident. Some realty companies sign contracts beyond their capacity, borrow high-interest loans, sell the commodity houses first and use the money they get to pay back the loans and invest in other projects.

This is risky business because in case any problem arises, such as a downslide in the market, their funding chain will break, and the homebuyers will find it hard to get their money back, which in turn could cause social instability.

That's why the proposal in Guangdong has been praised by netizens on domestic social media. If the system is scrapped, the realty market will hopefully cool down. Some realty enterprises could suffer "losses" and pose a financial risk to financial institutions such as banks. But the financial institutions can prevent that risk by adjusting their loan structures in advance.