China’s shadow lending system could be trying its hand at sub-prime banking. And if China’s real estate market goes, it will likely be just what George Soros continues to be warning about since January as he announced he was shorting your local currency, the renmimbi.
The China Banking Regulatory Commission said over the weekend that Shanghai banks cannot cooperating with six mortgage brokers for about 1 month for violating lending policies. Branches of seven commercial banks admitted on Monday that they will suspend mortgage lending for clients brokered by those six firms for two months so as to clamp down on 房貸, the Shanghai office of your Commission said.
It’s unclear exactly what China means through the “gray market”, but it does appear like mortgage brokers and their partner banks are operating over time to get investors and first-timers in to a home as China’s economy slows.
If this is happening in Shanghai, imagine the interior provinces where there exists a housing glut plus they are certainly more reliant on the real estate business for revenue.
The central and western provinces are already hit hard from the slowdown of the whole economy and for that reason, existing property supply may be a hard sell, Macquarie Capital analysts led by Ian Roper wrote in a report protected by Bloomberg on Monday. Another wave of the latest housing construction won’t aid to resolve the oversupply issue over these regions, and mortgage lenders could be using some “ancient Chinese secrets” either to unload these to buyers or fund them a tad bit more creatively.
To many observers, this looks a little a lot of like what the seeds of a housing and economic crisis all rolled into one.
The creative products that wiped out U.S. housing in 2008 — generally known as mortgaged backed securities and collateralized debt obligations linked with sub-prime mortgages — had been a massive, trillion dollar market. That’s not the case in China. But that mortgage backed securities industry is growing. As they are China’s debt market. China’s debt doesn’t pay a hell of any lot, so some investors trying to find a bigger bang may go downstream and locate themselves in uncharted Chinese waters with derivative products loaded with unsavory property obligations.
Chinese People securitization market took off last year and it is now approaching $100 billion. It is Asia’s biggest, outpacing Japan by three to just one.
Leading the drive are big state-owned banks such as the ones in Shanghai that have temporarily de-activate use of their loans from questionable mortgage firms. Others within the derivatives business include mid-sized financial firms seeking to package loans into collateralized loan obligations (CLO), that are better than CDOs insofar as they are not pools of independent mortgages. However, CLOs can include loans to housing developers dependent on those independent mortgages.
China’s housing bubble is different in comparison to the United states because — to date — there has been no foreclosure crisis along with the derivatives market that feeds off home mortgages is small. Moreover, China home buyers are required to make large down payments. What generated the sub-prime housing marketplace inside the Usa was the practice by mortgage brokers to approve applications of those who had no money to place on the house. China avoids that, on paper, because of its down payment requirement.
What is not clear is really what property developers are adhering to that policy, and who may be not. And also in the instance where that type of debt gets packed right into a derivative product, then China’s credit becomes a concern.
The marketplace for asset backed securities in China continues to grow thanks to a different issuance system. Further healthy expansion of financial derivatives might help pull a large sum out of your country’s notoriously opaque shadow banking sector and set it back on banks’ books, giving China more transparency.
But Shanghai’s crackdown this weekend demonstrates that authorities are keeping a detailed eye on mortgage loan brokers whether or not the “gray market” is not really necessarily connected to derivatives.
Kingsley Ong, someone at law office Eversheds International who helped draft China’s asset-backed security laws in 2007, called the potential of securitization in China “nearly unlimited”.
The lack of industry experience and widespread failure to disclose 房屋貸款 have raised questions about its ultimate affect on the broader economy.
All of this “eerily resembles what happened during the financial crisis inside the United states in 2007-08, that has been similarly fueled by credit growth,” Soros said in a meeting at the Asia dexlpky85 in New York on April 20. “A lot of the money that banks are supplying is required to keep bad debts and loss-making enterprises alive,” he stated.
That goes for housing developers searching for buyers and — perhaps — the mortgage brokers and banks willing to assist them to maintain businesses afloat.
Rutledge told the China Economic Review back in November that there had been a real risk.
China’s securitization market took shape in April of 2005 but was suspended in 2009 due to U.S. housing crisis as well as its link to the derivatives market China happens to be building. Regulators lifted the ban on mortgage backed securities in May 2012, though they outlawed re-securitization products and synthetic CDOs, which are CDOs of CDOs, the uicide squeeze that helped kill lots of American banks including Lehman and Bear Stearns.