China’s property sector may have seen a total loan of 20 trillion yuan, when factoring in those funneled through illegal or "underground" channels, according to a conservative estimate.
China’s property sector may have seen a total loan of 20 trillion yuan, when factoring in those funneled through illegal or "underground" channels, according to a conservative estimate, the China Business News reported, quoting banking sources.
These “hidden” loans should also be evaluated, when testing banks’ sustainability of a fall in property prices, the newspaper said.
Loans in the property sector were 10.46 trillion yuan by the end of the third quarter, showed an official statistical report, which traces the flows of loans from financial institutions.
The hidden loans include those borrowed from banks disguised as “operation financing” or others and then diverted into housing projects, as well as loans mortgaged by housing projects, which usually account for a relatively larger part in total, according to the newspaper.
For example, a chief executive with a leading steel mill surnamed Chen said his company usually sought for finances from banks for the acclaimed reason of “financing production projects”, but the money would finally go to speculative activities in the property sector, the newspaper said.
Speculators are also taking advantages of banks’ mortgage services to obtain as much as loans. Mr. Lv, as quoted by the newspapers, got 700,000 yuan of loans in 2006 by mortgaging his house –at that time valued the house was valued at 1 million yuan. Price of this house rose to 1.5 million yuan one year later, and Mr. Lv signed a new mortgage agreement with another bank based on the current value and got 350,000 more loans.
Such practices were abandoned in 2007, but new measures have been designed ever since to circumvent regulations. Some lenders have even packaged such loans into wealth management products.
The existence of hidden loans will greatly affect the results of stress tests on property loans in future. A top banking executive on the condition of anonymity said the recent round of stress test has already factored in the “hidden property loans.”
Despite this, however, results of the stress tests would be deflected on uncertainties and inaccuracy in the grey loans.
The risks associated with Chinese banks’ property loans are “totally controllable” even in the worst case scenario where real-estate prices fall 50 percent, Former head of the China Banking Regulatory Commission Lu Mingkang told a financial forum last Friday.