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UPDATE 3-Mega cities fan China's home prices further in test for policymakers

·2 min read

* January new home prices up 0.3% m/m vs 0.1% in December

* January new home prices up 3.9% y/y vs 3.8% in December

* 53 out of 70 cities reported higher prices, vs 42 inDecember

* Growth mainly fuelled by hot demand in tier-1 cities(Adds picture available, changes lead paragraph to reflectpolicy challenge)

BEIJING, Feb 23 (Reuters) - New home prices in China grew ata faster pace in January, driven by red-hot demand in thecountry's mega cities despite several rounds of governmentcooling measures, raising the challenge for policymakers as theytry to curb financial risks.

Average new home prices in 70 major cities increased 0.3% inJanuary from a month earlier, the fastest growth sinceSeptember, according to Reuters calculations based on datareleased by the National Bureau of Statistics. That comparedwith an uptick of 0.1% in December.

On a year-on-year basis, new home prices rose 3.9%,quickening from a 3.8% gain in December.

As China's economy rebounds from the COVID-19 shock,authorities have stepped up curbs on the property sector tosafeguard against financial risks as concerns grow of aspeculative bubble in some parts of the market.

The NBS data showed 53 cities reported monthly growth, withthe number rising from 42 in December.

The relentless upward price pressure was again mainly drivenby bigger cities. New home prices growth in tier-1 cities,including Beijing, Shanghai, Guangzhou and Shenzhen, quickened0.6% from the previous month, while second-hand home pricesposted a sharper gain of 1.3%, with growth in both sectorsoutpacing lower-tier cities.

The price uptick at the beginning of the year can be mainlyattributed to the record volume of credit issued in January,said Zhang Dawei, an analyst with property agency Centaline.

"The flows of business loans, which enjoy a huge interestrate spread with the normal mortgages, into the property sector,have particularly fuelled the upward pressure in top-tiercities."

Central bank data showed China's new bank loans leapt to newhighs in January boosted by seasonal demand, with householdloans, mostly mortgages, more than double the level seen inDecember.

China's property market recovered quickly from the COVID-19crisis last year, mostly in bigger cities. But the rebound hasraised concerns about financial risks and policymakers havesince then tightened screws on the funnelling of funds into thesector.

Last month saw major cities including Shanghai, Shenzhen andBeijing unveiling tighter regulations to close loopholes in hometransactions and contain illegal flows of funds into the sector.These steps came on top of a slew of measures it took lastyear.[nL4N2K6022]

Mortgage rates have also climbed recently.

"We should stay alert to the resurgence of house price risesor market speculation, especially if the coronavirus epidemic iseffectively controlled and the economy stages a solid rebound,"said Yan Yuejin, director of the Shanghai-based E-house ChinaResearch and Development Institution.

(Reporting Liangping Gao, Lusha Zhang and Ryan Woo; Editing byShri Navaratnam)