Beijing Struggles to Staunch Illicit Use of Bank Loans for Home Down Payments


Heightened regulatory scrutiny of the illicit use of bank loans for property investment purposes has thus far failed to fully deter promotion of the practice by realtors in Beijing.

The provision of loans for down payments on properties became widespread across China in recent years, due to surging prices in urban housing markets and a minimum down payment of at least 30% for first-time homebuyers in most major cities.

Last year China’s central bank launched a crackdown on the provision of loans for down payments by developers and real estate agencies, and has since reiterated its stance on the practice during the current round of property control policies.

In March of this year the Beijing banking regulator and the People’s Bank of China Business Management Department jointly issued the “Notice on Strengthening Risk Management in Relation to Residential Lending Operations in the Beijing Area,” which required that commercial banks step up their due diligence of customers, as well as investigate the sources of funds for home down payments and use these requirements to refuse loans to leveraged borrowers.

The Notice further required commercial banks to focus preventing the illicit use of consumer or personal business loans to pay off home down payments.

Domestic media reports published in early September indicate that despite these stern measures the practice of down payment financing continues to surreptitiously flourish in the Chinese capital, with realtors encouraging homebuyers to lie to complicit banks in order to obtain consumer or business loans that can be used to make down payments for properties.

Developers of new apartment complexes are also offering to provide interest-free financing to buyers that would effectively reduce the 50% down payment required in Beijing to as little as 10%.

Media reports of the illicit use of bank loans for property investment have since been substantiated by regulatory officials.

One figure from the Beijing banking regulator said to Securities Daily that the city’s banking sector financial institutions had seen rapid growth  in personal business and consumer loans.

“However, the market situation indicates that the above two types of loans issued by certain banks are flowing into the real estate market in breach of regulations, and borrowers are using them to buy residential properties, instead of for personal business or daily consumption.”

In order to address the problem, the Beijing banking regulator and the People’s Bank of China Business Management Department jointly issued the “Notification on Undertaking Investigations into the Illicit Flow of Bank Personal Loan Funds into the Property Market (Jingyin Jianfa (2017 no. 153).”(北京银监局 人行营业管理部关于开展银行个人贷款资金违规进入房地产市场情况检查的通知), requiring that banks within their jurisdiction undertake investigations into the illicit use of personal business and consumer loans for property investment purposes.

A new investigatory report by Securities Daily has since found that these regulatory signals have failed to deter many realtors from offering down payment loans to home buyers.

One realtor in Beijing told reporter Liu Meng that it cooperated with a total of three different banks to provide loans for down payments or home investment purposes.

If the borrower is not already a home owner, each bank would be willing to provide a loan of up to 300,000 yuan for a maximum term of five years at a rate of around 5.5%, while the provision of a home ownership certificate could secure borrowers a loan of up to 500,000 yuan for a similar term, and an interest rate of around 4.5%.

Banks are also willing to lend 300,000 yuan under more flexible conditions for a rate of around 6.5%, to qualified borrowers who would like to see their loans paid off in advance.

According to Liu multiple realtors around Beijing offered similar financing plans when the reporter posed as a prospective homebuyer, as well as claimed that cooperating banks were willing to provide special rates via agencies that could not be obtained by independent borrowers,who would need to pay interest of at least 8%.

Many realtors also said that recent media reports and the notice issued by the Beijing banking regulator would have a negligible impact on down payment loans.

Liu points out, however, that some realtors who had previously been willing to provide down payment loans directly refused the request upon a second visit, as well as indicated that the company had now prohibited the practice.