Chinese Mortgages Tighten Fast

By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Originally published at Investing in Chinese Stocks; cross posted from MacroBusiness

That was fast. A year ago China was in the middle of a roaring housing bubble, one that was starting to spread into second-tier cities. Credit growth was strong as well, but mortgage lending made up a large amount of credit growth, more than 100 percent in July. Fast forward to today. After about 4 months of intensifying buying and credit restrictions, plus a Spring Festival bookended by rate hikes, credit conditions have gone from loose to very tight. So tight that some Chinese banks are encouraging borrowers to repay their debt ahead of schedule.

iFeng: 一二线城市房贷全面收紧 有银行鼓励提前还款

Under the control of the real estate industry in 2017, the financial environment to tighten the trend has been significant trend. Reporters learned that recently small and medium-sized commercial banks in Shanghai to ease the balance of housing loan pressure to require sub-branches to encourage mortgage customers in advance of repayment, and even advance payment of relief money to give concessions.In addition, Beijing, Shanghai, the two first-tier cities are currently less than 9% off housing loan interest rates have been extinct, there are commercial banks will be less than 95% discount mortgage interest rate approval power all reverted to the branch level, you want to get 9 Discount interest rates more difficult. There are indications that the property market in 2017 the financial environment or will no longer be relaxed.

According to report, small and medium commercial banks in Shanghai in order to ease the mortgage balance of pressure, at the end of January issued a “mortgage on the end of the emergency pressure on the balance of the notice,” asked the branch, the business department as soon as possible repayment of existing housing loans repayment ahead of schedule Demand for the mortgage has been applied for early repayment and early intention to apply for early repayment of the customer, asked the branch to proactively contact customers, as soon as possible to complete the repayment operation, and part of the advance repayment to customers free of charge penalties preferential policies to guide Customers use idle funds for part of the early repayment.

“Although this initiative to encourage early repayment of mortgage customers is still only individual banks stage of window guidance, but small and medium-sized banks housing loans tight is a common phenomenon.” Shanghai Centaline Property Market analyst Lu Wenxi told reporters in Shanghai mortgage Large state-owned banks have not seen such a situation, but a number of small and medium-sized commercial banks have reflected the tight mortgage balance, and only in residential real estate loans, commercial real estate is not affected. Beijing and Shanghai from the two large real estate intermediary agencies to reflect the situation, the current housing loans to banks lending pace is generally slowed down.

“Although this initiative to encourage early repayment of mortgage customers is still only individual banks stage of window guidance, but small and medium-sized banks housing loans tight is a common phenomenon.” Shanghai Centaline Property Market analyst Lu Wenxi told reporters in Shanghai mortgage Large state-owned banks have not seen such a situation, but a number of small and medium-sized commercial banks have reflected the tight mortgage balance, and only in residential real estate loans, commercial real estate is not affected. Beijing and Shanghai from the two large real estate intermediary agencies to reflect the situation, the current housing loans to banks lending pace is generally slowed down.

The article also discussed the extinction of the 10 percent mortgage discount in the top-tier cities.

Beijing, Shanghai, Guangzhou is currently less than 10% discount housing loans preferential interest rate has been completely extinct, there are commercial banks will be less than 95% discount mortgage interest rate approval power all reverted to the branch level, you want to get 10% Interest rates are harder. Second-tier cities in a few years after the bank raised the first mortgage interest rates, such as Qingdao, Dalian, Zhuhai and other places of the bank interest rate discount from 85 fold to 9 fold. There are indications that the property market in 2017 the financial environment or will no longer be relaxed.

The central bank is walking a thin line: 央行利率新措施出炉 严厉举措透露出一大信号

Fed rate hike in March this year, the probability is not high, from the real estate, stock market, the bubble is being gradually squeezed. The central bank so quickly to tighten the monetary direct fuse is what? Is to control the financial high leverage.

Central Bank to see the data, so that the central bank had to raise the interest rate corridor – in January the loan is too much, State Securities February 8 research report that the “early lending early earnings” and the end of 2016 part of the credit demand extension After the impact of commercial banks is expected to add 2.8 trillion yuan in January credit, social financial 3.6 trillion yuan, seasonal high growth, the latter with the central bank to raise money market interest rates to strengthen the MPA assessment and other multi-caliber regulation and slowdown in real estate sales, Credit expansion is expected to come down. Before the Spring Festival put so much money, the central bank after the Spring Festival must be recovered as soon as possible.

If not recovered, the consequences are serious. Financial institutions to get the money in hand, and no good project lending, will enter the virtual economy through various channels, or the use of highly leveraged gloves wolves-style equity acquisition, or to enter the real estate market so that mortgages soar, Or like the first half of 2015, like in the back support the stock secondary market.

Even more frightening is that some local banks are likely to put a lot of money behind the stealth shareholders, so that these capital predators in the market turn the clock over and over again, who wants to make money who make a fortune.

February 7 of the “China Securities Journal” published an article some truth. The article argues that the financial deleveraging has become the most important macro-control, while ensuring the liquidity of basic and reasonable demand, the central bank through the delivery of “short money” and “money” to suppress leveraged arbitrage, term arbitrage operating orientation will not change.

…To prevent the beginning of crazy lending, to prevent funds disguised into the stock and real estate market, is the fuse of the central bank attack. Long-term reasons, it is to deal with capital outflows, to prevent the Federal Reserve to raise interest rates to prevent inflationary pressures caused by rising PPI.

From the second half of last year to raise capital costs, so that various industries in the warm water to gradually adapt to high-interest environment, so as not to raise interest rates when the real rush. But it needs to be emphasized that the central bank will certainly go to leverage while maintaining overall market stability.

Policymakers believe credit will flow into the “real” economy if they choke off all other avenues, but every time they’ve tightened, the economy slows. The private sector either doesn’t want to borrow or banks don’t want to lend to the higher risk businesses. Policymakers panic, open the spigots, force SOEs to borrow and watch the private sector speculate on bonds, stocks, housing, or take the money out of the country. China’s GDP growth is part of a magic act, misdirection to give an air of stability while the economy swings from hot to cold and back again at an ever increasing pace.

Tightening goeson, via iFeng: 知情人士:央行明确控制一季度新增贷款 低于去年四季度

Reluctant to be named Informed sources had said that because of credit growth too fast, the Chinese central bank made it clear that commercial banks must strictly control the first quarter of new loans. In principle, a quarter of the total amount of new housing loans and growth rate is lower than the fourth quarter of last year.

This may explain why small and medium banks in Shanghai, as one anecdotal example, are encouraging early repayment of existing mortgages. The article goes on to discuss the tightening:

Today, “China Securities News” quoted in the front page article quoted a number of analysts, taking into account the steady exchange rate, financial deleveraging, control the real estate bubble and inflationary pressures, this year’s monetary control has continued to tighten the possibility.

Minsheng Bank Research Institute of Financial Development Research Center, said Wang Yifeng, deputy director of commercial banks to raise mortgage interest rates is the market of the autonomous behavior. Since 2016, various types of housing loans booming demand and supply, especially in large amounts of personal mortgage loans, but according to estimates, the first set of mortgage loans as a result of more discounts, the overall pricing is low, affecting bank returns.

“Considering this year the market demand for mortgage loans is still strong, the company demand for loans to pick up, coupled with the central bank raised the short-term capital costs and other factors, some commercial banks in the initiative to optimize pricing behavior, the lower the pricing of the first set of mortgage Loans to internal requirements, the market this year, the overall pricing of mortgage prices higher than last year, which is conducive to stabilizing the bank net interest margin, “he said.

Hai Tong Securities in today’s report that, from the perspective of bank asset allocation, if the mortgage risk capital account for the factors taken into account, the current mortgage interest rates and bond yields are still relatively low. To improve returns, it is estimated that discounted mortgages will all disappear in the future. “In the mortgage market, interest rates have also begun, and will continue,” the report said.

The article references this Bloomberg article from January 25. China Said to Order Banks to Curb New Loans in First Quarter

Related from SCMP: Mortgage draw downs slow to a trickle as China tightens credits

Chinese commercial banks are slowing the ability of their borrowers to draw down on their loans, amid a directive by the People’s Bank of China to tighten the disbursement of credit to keep property prices in check and prevent capital flight.

One of Bank of Communications’ Shanghai branches delayed the drawdown of a 1.5 million yuan mortage loan — approved at the end of 2016 — by three months until March, according to a borrower who declined to be named. The bank’s branch declined to comment.

Similar delays of between three to four months have been reported across the city at the China Merchants Bank and the Industrial & Commercial Bank of China, according to bank customers. Officials at both banks declined to comment.

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10 comments

  1. Herky

    There was an article a couple months back on Business Insider, I think, which may even have been linked to from NC where a China analyst pointed out that Chinese housing bubbles were far less risky than US ones due to the percentage of houses there purchased with cash, rather than the typical US model of 2%-10% down, remainder in mortgage. When “popped”, a US housing bubble resulted in massive number of foreclosures, while a Chinese one would mostly just result in a lot of highly annoyed homeowners (“owner” being key word).
    So while not doubting the accuracy of above analysis, it would also be useful to understand the larger market picture. If mortgages are used in only a small percentage of home sale transactions in China, this above news has much less potential impact. Any China experts out there to opine?

    Reply
    1. PlutoniumKun

      There is a lot of confusion out there on this topic. I’m not a China expert, but a bit of a long time China watcher.

      I don’t know the exact figures (I’m not sure anyone does), but while its true that the Chinese housing market runs much more on cash purchases than mortgages, there is a lot of evidence that many purchases are made with informal loans. As one Chinese friend put it to me ‘in my village, everyone owes money to everyone’. There are all sorts of informal loan arrangements, a sort of shadow shadow banking system if you like. I don’t think anyone knows the true extent of it. I would strongly suspect based on what I’ve heard that there are a lot of little ponzi schemes all over China with property investments being part of the web.

      Another key issue is that its not simply a case of people being able to purchase their home outright. Because of financial repression (a key part of the Asian economic model), people have nowhere to put their long term savings but in property if they want any sort of capital appreciation or revenue. A lot of homes are empty, they are simply owned by people as repositories of their savings (they don’t even rent them out). So if property goes down 20%, that is pretty much equivalent to everyones pension savings going down by that rate. Thats a pretty serious issue in a country with a very thin social welfare system for the elderly. Its not an issue if a crash is part of long term boom and bust, but if property never recovered (as with Japan), then that leaves a lot of people very short on retirement funds.

      A further factor to bear in mind is what you might call the ‘Irish model’ of a housing collapse. In 2008 when the crash hit Ireland there were actually relatively few delinquent mortgages, mostly because there was no equivalent of sub-prime. The banking system collapsed not due to people not paying their mortgages, but because the banks had loaned too much to the developers for land purchases and construction. The mortgage banks actually came out of the Irish crash pretty much ok, it was the banks that had loaned money to property speculators and construction companies that went kaboom. I would strongly suspect the same problem would afflict China.

      And finally…. selling land for property investment represents something like 25% of local government revenues – China has a very weak taxation structure, so grabbing land and selling it on for development is a major part of government revenues. So if property crashes, so does the governments ability to pick up the slack in construction, so this could be a strong pro-cyclical factor that could make a crash much worse.

      Reply
      1. IICS

        All true. Many people received free homes when the SOEs privatized in the 1990s, so home ownership is very high. People will borrow against that house to buy another, or help a child buy a home. From a national balance sheet view, the housing situation doesn’t look too bad. But it’s the marginal buyer that matters for incremental demand and they may be leveraged to the hilt. Only a year ago, the government was cracking down on Internet finance because people were borrowing for down payments. When real estate cooled rapidly in 2014-2015, there were cases of jingle mail because speculators are leveraged.

        Looking at the margin, China has far more extreme credit events. A few years ago, people would take out a loan, buy copper and stash it in a warehouse, then mortgage the copper for a bigger line of credit (banks considered copper a good asset) and loan that money to real estate developers. The developers sell homes before construction even begins and use the buyers’ down payments to payback short-term loans or to obtain the financing for construction. Then the housing market cooled, the velocity of money in this corner of the economy collapsed and it turned out some people had pledged the same copper to multiple banks…. That’s one of many funding scheme that have blown up in recent years.

        Does this stuff matter? Obviously to this point the activity at the margin wasn’t big enough to blow up the system. A lot of China bears still think a crisis is unlikely, even if they predict much slower GDP growth. In my opinion, if they keep papering over every credit event, it’s death by 1000 cuts for the currency. TANSTAAFL.

        Reply
    2. P A

      Chinese middle-class household formation / household downpayment is three generations of life savings.

      1) Husband’s mom-and-dad’s life savings.
      2) Wife’s mom-and-dad’s life savings.
      3) Husband and wife’s life savings.

      Children are expected to take care of their parents until death. The one child policy means that a married couple’s parents only have one child to support them in old age. The married couple’s 4 parents are making an investment in their own senior care.

      Reply
      1. jrd2

        Ha! I have joked that the only way the Tier 1 property pricing is sustainable is if a 1/2 child per family policy is adopted, thereby allowing 8 parents to funnel their life savings into an apartment for the couple.

        Reply
  2. NotSoSure

    10% drop and I bet you the government will turn on the spigot again. At the end of the day, their housing market is like the stock market in the US.

    Reply
    1. Foppe

      Not sure I agree — the US stock market price level is driven by excess cash, too few investment opportunities; the Chinese housing market is a deliberate “solution” to an external (to China) drop in demand that briefly led to mass unemployment.

      Reply
  3. Gman

    ‘Policymakers believe credit will flow into the “real” economy if they choke off all other avenues, but every time they’ve tightened, the economy slows. The private sector either doesn’t want to borrow or banks don’t want to lend to the higher risk businesses. Policymakers panic, open the spigots, force SOEs to borrow and watch the private sector speculate on bonds, stocks, housing, or take the money out of the country’

    How long before these debt laden state pawns, sorry ‘assets’ are labelled as ‘irredeemably inefficient’ and those used to making money in their sleep start to smell easy meat I wonder?

    ‘Communist’ China’s economy grew exponentially in double quick time, so maybe it’ll hit the same speculators’ ‘sweet spot’ that took most developed western economies 30 to 40 years to get to after the war?

    I’m sure ‘the black or white cat’ will still catch mice, but as nearly 40 years of neoliberalism has proved, just how many, and for whom exactly, should be the question on most Chinese lips.

    Reply
  4. susan the other

    OK then. Peter the Big One. That translation was incomprehensible but amusing. Gotta rely on basic Minsky. When housing bubbles get too big they distort all other components in economics in the country. One way to contain the bubble is to pop it – stop credit cold. Support the value of the currency even if people starve to death. (Oxymoron?) But as we are seeing now, here in the US, this ruthlessness has eternal consequences. Far beyond anything we are yet to experience. The collective memory of “the people” is an amazing thing. That, maybe, transcends generations — so it i a lesson that is even dearer than gold; it becomes credibility. Good faith. I like that part.

    Reply

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