Fraudulent Property Financing Runs Rampant Around China

Various forms of fraudulent property financing have spread like wildfire around China, helping to inflate real estate markets amidst a crackdown by regulators.

In September reports began to circulate within China’s domestic press about the increasing use of consumer or business loans to make the down payments for properties, following an increase in down payment requirements to at least 30% and the imposition official caps on lending for real estate purchases.

Regional regulators subsequently cracked down on the illicit channelling of consumer or business loans towards property investments, amidst broader efforts by the Chinese government to contain overheating real estate markets.

A new special report from Reuters indicates that these efforts have yet to prove fruitful, with fraudulent property financing still running rampant around China.

It cites one case in the Nanshan district of Shenzhen which saw the parties to an apartment transaction draft fake purchase agreements to inflate the price of the property when applying for a mortgage with the Bank of China, in order to qualify for a larger loan.

This practice is referred to as a “yin-yang”contract, involving the drafting of real and fake sets of agreements simultaneously, in order to use them for separate purposes.

The chief forms of mortgage fraud currently practised in China involve either the use of false documents by unqualified borrowers to obtain financing, or the channelling of other forms of financing, such as consumer or business loans, into property investments.

Hu Weigang, a senior partner at Guangdong Shen Dadi Law Firm and real estate litigation experts, said these fraudulent practices have become so widespread that perpetrators are rarely punished.

“When everyone is doing it,  you can’t put everyone in jail,” said Hu to Reuters.

Industry sources based in Shanghai told Reuters that around 50% to 60% of their clients had engaged in mortgage fraud via the falsification of application documents, a practice dubbed as “re-packaging” within the industry.

Surging property prices over the past several years have caused immense concern about the formation of bubbles in urban real estate markets, while also giving average Chinese citizens a keen sense of urgency when it comes to investing, in order to obtain homes while they’re still affordable and then capitalise on skyrocketing prices.

Official data indicates that Chinese housing prices rose by 12.4% in 2016, for their fastest rate of increase since 2011, while a report from the Chinese Academy of Social Science indicates that prices in 33 major cities surged by 42% last year.

A research note from Deutsche Bank released in March indicates that the 2016 rise in property prices added 24 trillion yuan to the total household wealth of China’s 37 most developed cities, equal to nearly twice the value of total disposable income of 12.9 trillion yuan.

A crackdown on the urban real estate markets since March of this year has since slowed growth in the property market, however, with the China Academy of Social Sciences anticipating further cooling in 2018.

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