China Bubble: No Money Down Housing Proliferates, Echoes US Subprime Loans

In desperation to sell an oversupply of properties, Chinese developers have evaded regulations to offer "no money down" housing loans which the Bloomberg associates with the risks of US subprime loans

China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis.

Deals skirting government requirements for minimum 30 percent down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers.

Loosening down-payment requirements could erode China’s financial stability by adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years. Government warnings to consumers indicate that officials will strive to limit such arrangements, a sign of stress in a property market with a glut of homes.

Well, this has not just been an exclusive Chinese affair, Sovereign Man’s Simon Black points to the same financially destabilizing risks of NO money loans down in the Philippines.

Going back to China, the earlier stimulus of “additional spending on railways, upgraded housing for low-income households and tax relief for struggling small businesses” plus the central bank, the PBOC’s calls for “nation’s biggest lenders to accelerate the granting of mortgages” or the political way to solve debt problems with even more debt, appears to have delayed an economic meltdown as banking loans and money supply growth recovered in May.

From another Bloomberg article: (bold mine)

Local-currency loans were 870.8 billion yuan ($140 billion), the People’s Bank of China said on its website yesterday, higher than 42 out of 43 analyst estimates in a Bloomberg News survey. M2, the broadest measure of money supply, rose 13.4 percent, compared with a median projection for 13.1 percent…

Aggregate financing, China’s broadest measure of new credit was 1.4 trillion yuan in May, matching the median analyst estimate in a Bloomberg News survey. The figure, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, compared with 1.55 trillion yuan in April and 1.19 trillion yuan in May last year. 

New yuan loans accounted for 62.2 percent of aggregate financing in May, up from 50 percent in April and 56.1 percent a year earlier, central bank data show.

Chart of China’s M2 and New Loans can be seen here.

Despite the rhetoric to control the shadow banks, the Chinese government continues to flush the system with liquidity. In mid-May, the PBoC injected 44 billion yuan ($7.1 billion). Yesterday the central bank added 104 billion to the interbank system for the 5th consecutive net weekly injection. This is a sign of how worried authorities are with the financial-economic system

While favoring the formal banking system, growth in May loans reveals that credit activities in shadow banks continue to swell.

So obviously all these measures have been meant to buy time. 

Today, Chinese equity markets as represented by the Shanghai Composite Index had been jubilant—as they have been up by about 1% (specifically .93%) on reported economic improvements.

From Bloomberg:

China’s industrial output rose 8.8 percent in May from a year earlier and retail sales gained 12.5 percent, the National Bureau of Statistics said on its website today.

Fixed-asset investment excluding rural households increased 17.2 percent in the first five months of the year, the Beijing-based agency said.

What you see depends on where you stand.

Fixed Asset investment has still been declining but yielded better than expected ‘forecast’

Industrial Production remains stagnant 

It's only retail sales that has shown slight improvement

Except for retail sales which looks like a dead cat’s bounce, both industrial production and fixed investment hardly points to a ‘recovery’. Recovery has been more a wishful thinking.

Nonetheless, in today’s credit addicted world, governments aim to keep the unsustainable party going by spiking the punch bowl with even more toxic credit, China's political response has been no exception.