China’s Bank Regulator Sees Growing Real Estate Risks

June 15 (Bloomberg) -- China’s banking regulator said it sees growing credit risks in the nation’s real-estate industry and warned of increasing pressure from non-performing loans. Risks associated with home mortgages are growing and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report published on its website today.

The regulator has told banks to report on risk exposure by the end of June to help prevent a credit boom from leading to more bad loans. Property-price gains spurred concerns that a record 9.59 trillion yuan ($1.4 trillion) of loans extended last year to combat the effects of the global financial crisis may be causing asset bubbles. “Coming through the global financial crisis, China’s banking sector has stepped onto a new level,” CBRC Chairman Liu Mingkang said in the report. “We remain cool-headed about the weaknesses to be addressed and fixed.” Credit risks in some industries that have seen a surge in investment may “emerge soon” as restructuring efforts intensify, the regulator said in the report. The rise in investment exacerbated the problem of excess capacity and over- development, it said.

Economic Growth

The country, the world’s fastest-growing major economy, expanded 11.9 percent in the first quarter from a year earlier. Measures to cool the real-estate market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second-home purchases. China’s property prices rose 12.4 percent in May, the second-fastest pace on record, showing little sign yet that the government crackdown on speculation will work to avert an asset- price bubble. The gain compared with a record 12.8 percent increase in April from a year earlier.

Some banks in China have transferred loans off their balance sheets in an effort to circumvent regulatory requirements and capital and loan-loss provisioning, the CBRC said in the report. Banks still assume the risks related to loan management and recovery even though the loans are not booked on their balance sheets, the report said. As a result, rising risks associated with banks’ activities in transferring their exposures off the balance sheet need “close supervisory attention,” according to the CBRC. The forces driving a sustained growth in China’s economy remain weak, it said. Structural imbalances are “acute,” external trade is threatened by rising protectionism and unemployment pressures remain severe, according to the report.

“All these pose further constraint for a substantial and meaningful rebound,” the report said. China’s changing macroeconomic environment and the acceleration of the economic restructuring means the possibility of a resurgence in credit risks or losses “remains high,” the watchdog said in the annual report.

about the chain effect:

local Chinese governments actually got a bulk of their tax revenues from land sales. So real estate price on its way up is all cheers and whistles; on the way down, however... just thinking about it give me shivers.

On the other hand, mortgages in China ain't even close to sub-prime level. The down payment is usually very significant, and lots of home buyers pay the whole thing with cash. What is dangerous are the speculators in the market, who have 1.money, 2. access to all resources possible, and enjoy betting home prices upward to unaffordable levels...

gaoyi0915 wrote:

about the chain effect:

local Chinese governments actually got a bulk of their tax revenues from land sales. So real estate price on its way up is all cheers and whistles; on the way down, however... just thinking about it give me shivers.

On the other hand, mortgages in China ain't even close to sub-prime level. The down payment is usually very significant, and lots of home buyers pay the whole thing with cash. What is dangerous are the speculators in the market, who have 1.money, 2. access to all resources possible, and enjoy betting home prices upward to unaffordable levels...

Quite interesting insight, thanks.
To me the main danger is in the leverage used by the homeowners and not that much in the one of the speculators. Could you clarify to what extent China isn't close to subprime, what's the leverage granted to homeowners, how is it difficult to get a mortgage there ? Thanks

from what i know, recently the percentage of down payment required to take out a mortgage is raised to 30%. I am not sure if home buyers in China use a lot leverages at all. The demographics actually makes the Chinese real estate market quite unique. Because of the single child policy, young couples who would like to buy their first home usually get wholehearted financial supports from their parents, and that's why many of the payments are cleared with by cash once and for all (since the saving rate is so high in China)

What worries me however is that if home prices suddenly drop, the real estate companies which paid huge prices for their lands won't easily get refinanced, and these real estate entities are pretty high leveraged ---- what they do is to buy the land, then use the land as collateral to take out the entire amount of money that will be used to actually build the houses, etc.

gaoyi0915 wrote:

about the chain effect:

local Chinese governments actually got a bulk of their tax revenues from land sales. So real estate price on its way up is all cheers and whistles; on the way down, however... just thinking about it give me shivers.

On the other hand, mortgages in China ain't even close to sub-prime level. The down payment is usually very significant, and lots of home buyers pay the whole thing with cash. What is dangerous are the speculators in the market, who have 1.money, 2. access to all resources possible, and enjoy betting home prices upward to unaffordable levels...

All in all I still think the people who can actually afford to speculate is a minority of the whole population... though it can definitely have strong negative effects on the economy if this situation isn't handled properly,

it would be wise for the gov't to start diversifying their income

gaoyi0915 wrote:

from what i know, recently the percentage of down payment required to take out a mortgage is raised to 30%. I am not sure if home buyers in China use a lot leverages at all. The demographics actually makes the Chinese real estate market quite unique. Because of the single child policy, young couples who would like to buy their first home usually get wholehearted financial supports from their parents, and that's why many of the payments are cleared with by cash once and for all (since the saving rate is so high in China)

What worries me however is that if home prices suddenly drop, the real estate companies which paid huge prices for their lands won't easily get refinanced, and these real estate entities are pretty high leveraged ---- what they do is to buy the land, then use the land as collateral to take out the entire amount of money that will be used to actually build the houses, etc.

What happened with the US subprime is the home owners, highly leveraged, were at the start of the chain. When the house price dropped they struggled to repay their mortgage, went in a delinquency process, foreclosure etc impacting the whole chain of players, including investment banks, insurers, etc with an exposure on those mortgages via ABS asset-backed securities (collateralized on the mortgages and granting more leverage on them), CDO of ABS (collateralized with the latter ABS and granting more leverage on them) and CDO of CDO of ABS

From what you describe, it looks like the situation is more controlled in China, I mean that's not the end of the world if a few real-estate builders and speculators go belly up...

A good example of this is the case of France. In France the level of leverage granted to home buyers is limited and people struggle to purchase a house as the conditions to be met are pretty restrictive (this said, I managed to get a mortage with 0 down payment in 2005, that's infinite leverage). Of course with the global crisis, the French house price dropped but it was more due panic selling and mass fear rather than due to any fundamental reason.

Quote :

Sauros Said:

"A good example of this is the case of France. In France the level of leverage granted to home buyers is limited and people struggle to purchase a house as the conditions to be met are pretty restrictive (this said, I managed to get a mortage with 0 down payment in 2005, that's infinite leverage). Of course with the global crisis, the French house price dropped but it was more due panic selling and mass fear rather than due to any fundamental reason."

Wow france is crazy! Infinite leverage FTL ! if china had that that would be much worse for sure!

Snapman wrote:

Quote :

Sauros Said:

"A good example of this is the case of France. In France the level of leverage granted to home buyers is limited and people struggle to purchase a house as the conditions to be met are pretty restrictive (this said, I managed to get a mortage with 0 down payment in 2005, that's infinite leverage). Of course with the global crisis, the French house price dropped but it was more due panic selling and mass fear rather than due to any fundamental reason."

Wow france is crazy! Infinite leverage FTL ! if china had that that would be much worse for sure!

No, once again the 0 downpayment was very specific and more due to my power of bullsh*tting the banker than anything else.
The general case is 20% down payment plus the monthly reimbursement of the mortgage shoudln't exceed 1/3 of your net income plus you have to be insured against the unemployment plus ...

I am from Vietnam and my grandmother used to tell me: "Gold is safe, but land is even better. Make sure you have a lot of it!" Any connections that you see with China? A bubble possibly? Do you see my point?

quidproquo wrote:

I am from Vietnam and my grandmother used to tell me: "Gold is safe, but land is even better. Make sure you have a lot of it!" Any connections that you see with China? A bubble possibly? Do you see my point?

I think this tends to be the mentality around the world. Ever average joe always is telling me to buy land! buy land! its the safest investment... well as we saw in 2008 maybe that wasn't the case. I think people are arguing a case that almost works for the majority of most asset classes. Eventually prices will go back up. In a sense its also like oil where supply is "fixed." Well thats until we get into space exploration ....

quidproquo wrote:

I am from Vietnam and my grandmother used to tell me: "Gold is safe, but land is even better. Make sure you have a lot of it!" Any connections that you see with China? A bubble possibly? Do you see my point?

Re Vietnam and Gold : Vietnam’s gold habit weighs down dong

Snapman wrote:

quidproquo wrote:

I am from Vietnam and my grandmother used to tell me: "Gold is safe, but land is even better. Make sure you have a lot of it!" Any connections that you see with China? A bubble possibly? Do you see my point?

I think this tends to be the mentality around the world. Ever average joe always is telling me to buy land! buy land! its the safest investment... well as we saw in 2008 maybe that wasn't the case. I think people are arguing a case that almost works for the majority of most asset classes. Eventually prices will go back up. In a sense its also like oil where supply is "fixed." Well thats until we get into space exploration ....

You know what's interesting. TECHNICALLY homeowners in China do not actually own their homes -- unless they are farmers. You pay the money and you get a certificate that states that you have the "right of use" over this property for XX years. What happens after the right expires I'm not sure. I guess after 50 years people can apply for an extension and pay some fees, but TECHINICALLY speaking the land belongs to the counrty (which is still TECHNICALLY communist)

gaoyi0915 wrote:

Snapman wrote:

quidproquo wrote:

I am from Vietnam and my grandmother used to tell me: "Gold is safe, but land is even better. Make sure you have a lot of it!" Any connections that you see with China? A bubble possibly? Do you see my point?

I think this tends to be the mentality around the world. Ever average joe always is telling me to buy land! buy land! its the safest investment... well as we saw in 2008 maybe that wasn't the case. I think people are arguing a case that almost works for the majority of most asset classes. Eventually prices will go back up. In a sense its also like oil where supply is "fixed." Well thats until we get into space exploration ....

You know what's interesting. TECHNICALLY homeowners in China do not actually own their homes -- unless they are farmers. You pay the money and you get a certificate that states that you have the "right of use" over this property for XX years. What happens after the right expires I'm not sure. I guess after 50 years people can apply for an extension and pay some fees, but TECHINICALLY speaking the land belongs to the counrty (which is still TECHNICALLY communist)

wow thats a very ineresting point. contrastingly in Vietnam, i think, and correct me if im wrong (quidpro), that Vietnamese nationals can own land (but the gov't obviously can reclaim it at any time). And if you are a vietnamese born immigrant or (repatriotor? ) you can buy into land for XX amount of years as well. I think foreigners are now open to that same law now.


gaoyi0915, do you think that the chinese gov't will change this policy and give land ownership to citizens? if so in what time frame? I'm guessing its really hard for foreigners to "own" land in china as well .

Snapman wrote:

gaoyi0915 wrote:

Snapman wrote:

quidproquo wrote:

I am from Vietnam and my grandmother used to tell me: "Gold is safe, but land is even better. Make sure you have a lot of it!" Any connections that you see with China? A bubble possibly? Do you see my point?

I think this tends to be the mentality around the world. Ever average joe always is telling me to buy land! buy land! its the safest investment... well as we saw in 2008 maybe that wasn't the case. I think people are arguing a case that almost works for the majority of most asset classes. Eventually prices will go back up. In a sense its also like oil where supply is "fixed." Well thats until we get into space exploration ....

You know what's interesting. TECHNICALLY homeowners in China do not actually own their homes -- unless they are farmers. You pay the money and you get a certificate that states that you have the "right of use" over this property for XX years. What happens after the right expires I'm not sure. I guess after 50 years people can apply for an extension and pay some fees, but TECHINICALLY speaking the land belongs to the counrty (which is still TECHNICALLY communist)

wow thats a very ineresting point. contrastingly in Vietnam, i think, and correct me if im wrong (quidpro), that Vietnamese nationals can own land (but the gov't obviously can reclaim it at any time). And if you are a vietnamese born immigrant or (repatriotor? ) you can buy into land for XX amount of years as well. I think foreigners are now open to that same law now.


gaoyi0915, do you think that the chinese gov't will change this policy and give land ownership to citizens? if so in what time frame? I'm guessing its really hard for foreigners to "own" land in china as well .

At this point foreigners cannot even buy apartments. Real estate companies are not allowed to sell to foreigners so whoever from America is living in China right now is renting. This policy I think is employed to fight against hot money pouring into the country that might cause a bigger real estate bubble. It is installed after the 1997 Asian financial crisis where countries like Thailand and Korea got leveraged up and eventually crashed.

You are asking me about politics now. I think given the "homeowners" influence and power in China it's a matter of time that the communist party recede on this. When? Absolutely no idea.