Banking regulators in several parts of China are targeting the surging use of consumer loans to fund down payments for real estate purchases.
Over the past year the Chinese government has stepped up efforts to contain the property market with the launch of a slew of policies to curb both purchases and lending.
Banking regulators in particular have adopted measures such as increases in the initial down payments for homes, caps on home lending volumes and strict inspections of prospective purchases in order to stymie speculative investment.
The measures would at first blush appear to be having some effect, with data from the People’s Bank of China indicating that new personal medium and long-term loans, which are comprised primarily of mortgages, were 467.7 billion yuan for the first seven months of the year, for a year-on-year decline of 50 billion yuan.
New personal medium and long-term loans accounted for 39% of new personal lending, marking a year-on-year decline of 26 percentage points.
Recent reports indicate, however, that the decline in mortgage lending is being offset by the increasing use of consumer and personal business loans to finance the down payments for home purchases in breach of regulations.
New short-term personal lending reached 1.06 trillion yuan for the first seventh months of the year, for an year-on-year increase of 713.7 billion yuan.
According to analysts much of this explosive growth in consumer and credit card lending is being used to fund home purchases, thwarting the government’s efforts to contain overheating property markets.
Securities Daily published an investigative report earlier this month claiming that realtors across Beijing were cooperating with banks to provide prospective home buyers with consumer or business loans for their down payments.
Shortly afterwards Beijing’s banking regulator required that municipal lenders heighten scrutiny of the final destination of funds, prompting some realtors in the city to suspend offers of down payment financing.
The problem now appears to extend to well beyond the Chinese capital, with the coastal province of Jiangsu and the southern manufacturing hub of Shenzhen also requiring that lenders within their jurisdiction investigate the use of consumer loans for real estate purchases, as well as implement appropriate rectification measures.
Beijing wants its lenders to focus on consumer loans of over 200,000 yuan (approx. USD$30,639.60), as well as cases where borrowers apply for more than two consumer loans in rapid succession or funds rapidly flow back into their bank accounts.
Shenzhen in the meanwhile has shortened the maximum term for consumer loans to five years, while Jiangsu is requiring that its commercial banks establish mechanisms for monitoring large-sum consumer loans, and submit monthly reports to banking regulators.
Zhang Yang, an executive in charge of lending operations at a commercial bank in southern China, said to 21st Century Business Herald that some companies are willing to help borrowers convert their consumer loans into cash, in order to sidestep regulatory restrictions when it comes to use of funds.
“Given the recent explosion in China’s property markets in recent years, it’s likely that many of these funds are flowing into real estate,” said Zhang.
While Chinese banks have established a variety of controls to monitor loan usage, according to Zhang it is not practical for them to ensure that all funds are used for their designated purposes given the huge amount of labor, time and cost that this would entail.
Zhang further points out that wide variation in the level of control and scrutiny applied by Chinese banks to consumer loans appears to have abetted their explosive growth in the first half of 2017.
According to Zhang Chinese borrowers often compare different banks in order to uncover those with more relaxed policies or regulatory omissions, believing that this will give them the opportunity to use the consumer loans for real estate purchases.
In Zhang’s opinion, while close blanket monitoring by banks is unfeasible, the latest government directives could have a heavy impact upon the illicit use of consumer loans by making home buyers more wary.
“The most important significance of these regulatory directives is affirming that all banks must strictly monitor the usage of consumer loans,” said Zhang.
“When all banks are tightening thresholds as well as making pre-loan and post-loan inspections much stricter, this will come as a major blow to the psychological expectation that consumer loans can be used to purchase property, and attempts to use consumer loans in breach of regulations could significantly decline.”