Chinese Banks Channel Funds to Real Estate Market Via Pawnbrokers
Pawnbrokers are providing funds obtained via bank-issued trust plans to prospective homebuyers, following a crackdown on real estate-related lending by Beijing.
The imposition of quotas on real estate lending prompted many Chinese banks last year to use consumer or personal business loans to covertly provide funds to homebuyers and property investors.
While regulators struck hard at these practices in the second half of 2017, Chinese homebuyers and property investors have been assiduous in their search for new methods to access funds.
A new report from Securities Daily indicates that some Chinese homeowners are pawning the property they already own in order to obtain downpayment loans or full loans for second homes.
While interest rates for this method of financing are much higher, pawnbrokers are an extremely quick as well as convenient source of funds, and involve a far simpler application process.
“This year the volume of customers as well as large-sum business have both increased,” said one member of staff at a pawnbroker chain in Beijing’s Chaoyang district to Securities Daily . “There are a considerable number of customers who are using the funds to buy homes.”
Chinese pawnbrokers are capable of engaging in “regulatory arbitrage,” because their lending activities aren’t subject to the same types of strict oversight and requirements they are broadly applied to mainstream financial institutions such as banks.
“We usually learn about how customers are using the funds while chatting. Our company does not at all require the signing of a funds usage agreement, and pawnbrokers do not supervise the whereabouts of funds.
“We don’t interfere if customers buy houses, speculate in shares, or make other investments. All we do is accept real goods as pledges, ensure that procedures are in compliance with regulations, and that contracts are complete.”
Chinese pawnbrokers typically employ two sources for funds that are provided for pledged homes – either funds belonging to the pawnbroker itself, or trust capital.
“The source of trust capital is trust plans issued by trust companies via banks or other channels. Cooperative partners such as pawnbrokers are found on the market in order to use the funds raised, with a standard monthly rate of 1.5%, and usually a maximum pledge term of two years,” said one industry insider.
With regard to the legality and risk of the process, the industry insider said that “the period of cooperation with the trust company hasn’t been long, and there are currently 500 – 600 million yuan of funds at hand. Our pawnbroker strictly abides by the provisions of administrative measures.
“The precondition for loan provision is the completion of procedures…individual customers must provide a real estate certificate, home purchase contract (if there is a mortgage they must also provide the loan contract as well as the home loan bank card), marriage certificate, identification, household registration, three party agreement and other materials.
“Based on our ‘processing – home visit – notarisation – pledging – lending’ procedure, loans can be made in as little as 8 hours, with a maximum pledge amount of 70% of the homes market value.
“If the market value of your property is 1 million yuan, and there is still 200,000 yuan on the loan that hasn’t been repaid, then the maximum amount you can obtain is 1 million yuan multiplied by 70%, minus 200,000 yuan, or 500,000 yuan.
“If you choose trust capital for a loan, in addition to the main contract, there is another attachment which must be signed that is similar to a letter of commitment, undertaking that the loan will not be used for investment.
“If funds are used to buy a home, we recommend that you do not use the bank card that has received the funds to directly purchase the home, but transfer them to a relative or friend before transferring the funds to another more suitable account of your own.”
While loans obtained from pawnbrokers can be quick and convenient to obtain, they also oftentimes come at exorbitant expense, with Securities Daily estimating that some forms of credit involve a total annualised interest rate of 25.55% when fees are included.
Chinese authorities have already taken notice of these issues, with measures recently introduced to shift the regulatory status of pawnbrokers.
Several days ago the Ministry of Commerce announced that it would be transferring responsibility for the formulation of operating and supervisory regulations governing financial leasing companies, commercial factoring companies and pawnbrokers to the China Banking and Insurance Regulatory Commission (CBIRC).
“At present post-loan regulation for the pawn sector is extremely inadequate…there are a huge number of customers who are ‘using homes to buy homes,” said one source in the pawn sector.
“We only ensure that procedures and contracts are fully compliant, but there are certainly a large number of grey areas.
“The transfer of oversight for the pawn sector to CBIRC could lead to further refinement of regulations, and greater standardisation in areas such as the entry and exit of funds.”
According to official data as of the end of February 2018 there were a total of 8532 pawnbrokers in China with 950 branch organisations, registered capital of 173.13 billion yuan, and 45,000 employees. The total assets of the sector were 164.12 billion yuan.