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March 10, 2016

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China to act against gray-market home loans

CHINESE regulators plan to tackle loans raised in the gray market for down payments as frenzied property buying in top cities has set off alarm bells ringing that a new bubble may be forming.

Pan Gongsheng, deputy governor of the People’s Bank of China, said yesterday that the central bank will tie up with the China Banking Regulatory Commission and the Ministry of Housing and Urban-Rural Development to scrutinize mortgage applications and reject down payments raised through property agencies, small-loan companies and peer-to-peer networks.

“A series of measures would be taken to curb the soaring housing prices in first-tier cities, including a ban on lending business of property agencies,” Pan said during the annual political consultative meeting in Beijing.

The Shanghai office of the central bank voiced concern over the issue during a meeting with several commercial banks on March 2, people familiar with matter told Shanghai Daily.

The central bank asked the commercial banks to put a brake on the potential risks from “leveraging in the property market,” a scenario that they are keen to avoid after last year’s stock market bust.

Last summer, the gray-market margin loans for stock purchase piled up, leading to a speculative bubble that drove market value to more than double in just few months. It was followed by a massive crash that wiped out more than 40 percent of the value of the Chinese stocks.

Fears of massive sell-offs

“If there is a potential risk in the current property market, it is likely hidden behind those down payments,” an analyst, who did not want to be identified, at China Bohai Bank told Shanghai Daily.

“If by any chance the market sentiment worsens, the housing market would be hit by massive sell-offs triggered by the leverage. That is what the government is reluctant to see.”

Down payment, the initial amount that a home buyer has to pay before getting the mortgage from the bank, accounts for at least 30 percent of the total housing price in five big cities and 25 percent in other cities in China.

In February, China cut the minimum mortgage down payment for first-time home buyers in small cities and lowered the banks’ reserve requirement ratios that was intended to ease the housing inventory in third and fourth-tier cities. But the moves instead boosted the buying sentiment in cities with bigger population.

Shanghai’s residential property prices rose 24 percent during the first two months of the year. Prices in south China’s Shenzhen gained 52 percent over the past year, while in the country’s capital Beijing, prices shot up about 10 percent in the same period.

Property agencies and other financial institutions showed a quick appearance after the frenzied buying in Shanghai, Shenzhen and Beijing, providing home buyers with loan products to enable them to raise enough funds for down payments to banks.

Top property agencies like Homelink and Centaline as well as P2P lending platforms were offering financing to help buyers raise the necessary down payments, CITIC Securities Co said in a March 6 report.

At least 664 out of the existing 2,500 P2P lending platforms tapped into housing loan services in 2015, according to chief analyst Zhang Yuxia at Online Lending House, a portal site that tracks the sector.

Liu Yuan, a Shanghai-based research director of Centaline Group, said it was hard to estimate the size of gray-market lending but admitted that such loans posed risks, as the lending pool that bypass the traditional financial system would make “the actual leverage in mortgages higher than what bank data show.”

Systematic risks to banks

Other analysts said funds raised through these channels would transfer systematic risks to the banks, as some of them, such as P2P platforms, were not mature enough in providing reliable financial solutions after waves of frauds and Ponzi schemes that hit the sector last year.

It was an argument that was backed by Huang Qifan, mayor of Chongqing.

Huang warned investors about the so-called “financial innovation,” calling such practices as “sacrificing the stability of the financial system.”

Commercials banks have already stepped up inspections on mortgage in Shanghai, several sources told Shanghai Daily yesterday.

They were asked by the regulator to stop issuing housing loans on certain highly valued property projects, and review all the procedures.

“That underlines the government’s fears: banks lend more money than they should on possibly fake contracts that has made housing prices artificially high, and the leverage that has been added to the property loan system by funds from outside,” a customer manager at Shanghai Rural Commercial Bank said.

Since it was hard for banks to trace the source of down payments, she said banks would probably examine the clients’ credit situation to prevent risks of sour debt in the housing market.


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