China’s shadow lending system might be trying its hand at sub-prime banking. And in case China’s housing market goes, it will probably be precisely what George Soros continues to be warning about since January when 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 a minimum of 4 weeks 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 just two months in order to clamp down on 房貸, the Shanghai office of the Commission said.
It’s unclear precisely what China means with the “gray market”, however it does appear like mortgage brokers in addition to their partner banks work after a while to have investors and first-timers right into a home as China’s economy slows.
If this sounds like happening in Shanghai, think about the interior provinces where there is a housing glut and they tend to be more influenced by real estate business for revenue.
The central and western provinces have already been hit hard from the slowdown from the whole economy and consequently, existing property supply can be a hard sell, Macquarie Capital analysts led by Ian Roper wrote in a report paid by Bloomberg on Monday. Another wave of the latest housing construction won’t help to resolve the oversupply issue over these regions, and mortgage lenders could be using some “ancient Chinese secrets” either to unload those to buyers or fund them a little more creatively.
To many observers, this looks a bit an excessive amount of like what the seeds of your housing and economic crisis all rolled into one.
The creative goods that wiped out United states housing in 2008 — referred to as mortgaged backed securities and collateralized debt obligations associated with sub-prime mortgages — was really a massive, trillion dollar market. That’s not the case in China. But that mortgage backed securities marketplace is growing. As is China’s debt market. China’s debt doesn’t pay a hell of the lot, so some investors seeking a bigger bang could go downstream and locate themselves in uncharted Chinese waters with derivative products loaded with unsavory property obligations.
The Chinese securitization market took off just last year and it is now approaching $100 billion. It really is Asia’s biggest, outpacing Japan by three to 1.
Leading the drive are big state-owned banks just like the ones in Shanghai that have temporarily shut down use of their loans from questionable mortgage firms. Others from the derivatives business include mid-sized financial firms looking to package loans into collateralized loan obligations (CLO), which are better than CDOs insofar since they are not pools of independent mortgages. However, CLOs can include loans to housing developers influenced by those independent mortgages.
China’s housing bubble is unique in comparison to the U.S. because — so far — there has been 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 generated the sub-prime housing market within the Usa was the practice by mortgage brokers to approve applications of those that had no money to put on the house. China avoids that, on paper, due to the down payment requirement.
Precisely what is not clear is really what real-estate developers are following that policy, and who seems to be not. And in the instance where that sort of debt gets packed into a derivative product, then China’s credit turns into a concern.
The market for asset backed securities in China has exploded thanks to an alternative issuance system. Further healthy growth of financial derivatives may help pull a large sum out of the country’s notoriously opaque shadow banking sector and place it back on banks’ books, giving China more transparency.
But Shanghai’s crackdown this weekend shows that authorities are keeping a close eye on mortgage brokers even if your “gray market” will not be necessarily related to derivatives.
Kingsley Ong, an associate 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 absence of industry experience and widespread failure to disclose 房屋貸款 have raised questions regarding its ultimate effect on the broader economy.
All of this “eerily resembles what went down during the financial crisis within the Usa in 2007-08, which was similarly fueled by credit growth,” Soros said in a meeting on the Asia dexlpky85 in New York on April 20. “Many of the money that banks are supplying is needed to keep bad debts and loss-making enterprises alive,” he said.
That goes for housing developers looking for buyers and — perhaps — the mortgage brokers and banks willing to assist them to keep businesses afloat.
Rutledge told the China Economic Review back in November there was a real risk.
China’s securitization market took shape in April of 2005 but was suspended in 2009 due to the Usa housing crisis as well as its connection 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, that are CDOs of CDOs, the uicide squeeze that helped kill many American banks including Lehman and Bear Stearns.