China’s shadow lending system might be trying its hand at sub-prime banking. Of course, if China’s housing marketplace goes, it will likely be just what George Soros has been warning about since January when he announced he was shorting the neighborhood currency, the renmimbi.
The China Banking Regulatory Commission said on the weekend that Shanghai banks cannot cooperating with six mortgage brokers for a minimum of 4 weeks for violating lending policies. Branches of seven commercial banks admitted on Monday that they may suspend mortgage lending for clients brokered by those six firms for 2 months in an effort to clamp down on 房貸, the Shanghai office in the Commission said.
It’s unclear precisely what China means with the “gray market”, but it really does look like mortgage brokers in addition to their partner banks work over time to acquire investors and first-timers into a home as China’s economy slows.
Should this be happening in Shanghai, think of the interior provinces where you will discover a housing glut plus they tend to be more dependent on the real estate business for revenue.
The central and western provinces happen to be hit hard through the slowdown of your whole economy and thus, existing property supply may be a hard sell, Macquarie Capital analysts led by Ian Roper wrote within a report protected by Bloomberg on Monday. Another wave newest housing construction won’t assistance to resolve the oversupply issue in these regions, and mortgage lenders might be using some “ancient Chinese secrets” either to unload those to buyers or fund them a bit more creatively.
For some observers, this looks a lttle bit too much like exactly what the seeds of any housing and financial crisis all rolled into one.
The creative goods that wiped out Usa housing in 2008 — known as mortgaged backed securities and collateralized debt obligations tied to sub-prime mortgages — was actually a massive, trillion dollar market. That’s untrue in China. But that mortgage backed securities market is growing. As they are China’s debt market. China’s debt doesn’t pay a hell of any lot, so some investors searching for a bigger bang could go downstream and discover themselves in uncharted Chinese waters with derivative products stuffed with unsavory real-estate obligations.
The Chinese securitization market took off just last year and it is now approaching $100 billion. It is actually Asia’s biggest, outpacing Japan by three to just one.
Leading the drive are big state-owned banks like the ones in Shanghai which may have temporarily shut down entry to their loans from questionable mortgage firms. Others within the derivatives business include mid-sized financial firms trying to package loans into collateralized loan obligations (CLO), which are distinct from CDOs insofar because they are not pools of independent mortgages. However, CLOs might include loans to housing developers reliant on those independent mortgages.
China’s housing bubble is unique as compared to the United states because — so far — we have seen no foreclosure crisis and the derivatives market that feeds off home mortgages is small. Moreover, China home buyers are required to make large down payments. What triggered the sub-prime housing market from the Usa was the practice by mortgage brokers to approve applications of those who had no money to put on the property. China avoids that, on paper, simply because of its deposit requirement.
Exactly what is not clear is really what real estate property developers are following that policy, and who is not. As well as in the instance where that kind of debt gets packed right into a derivative product, then China’s credit gets to be a concern.
The marketplace for asset backed securities in China has grown thanks to a different issuance system. Further healthy expansion of financial derivatives will help pull a significant sum out of the country’s notoriously opaque shadow banking sector and set it back on banks’ books, giving China more transparency.
But Shanghai’s crackdown this weekend implies that authorities are keeping a close eye on mortgage loan brokers even if the “gray market” will not be necessarily connected to derivatives.
Kingsley Ong, a partner 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 on its ultimate impact on the broader economy.
All of this “eerily resembles what happened during the economic crisis from the Usa in 2007-08, which was similarly fueled by credit growth,” Soros said throughout a meeting at the Asia dexlpky85 in New York City on April 20. “Many of the money that banks are supplying is necessary 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 keep businesses afloat.
Rutledge told the China Economic Review way back in November that there had been a real risk.
China’s securitization market took shape in April of 2005 but was suspended during 2009 due to United states housing crisis along with its link to the derivatives market China is now building. Regulators lifted the ban on mortgage backed securities in May 2012, though they outlawed re-securitization products and synthetic CDOs, that happen to be CDOs of CDOs, the uicide squeeze that helped kill lots of American banks including Lehman and Bear Stearns.