In the past few years, every New Year’s Eve or Lunar New Year, the Chinese central bank always announces a rate cut to release liquidity to cope with the demand for cash payments for the Chinese New Year. However, at the end of 2020, not only did the central bank not cut the rate, the central bank and the CBRC also jointly issued a document asking banks to tighten mortgage loans! What signal is this releasing? Is the Chinese government really going to start to start with mortgage loans to completely burst the property bubble? Or is the central bank this time completely out of cards to play, the future to avoid the banking system liquidity and debt out of control, forced to limit housing loans? What about tearing down the east wall to mend the west wall? Let’s first look at the specific situation.
On December 31, 2020, the Central Bank and the CBIRC issued the Notice on the Establishment of a Concentration Management System for real estate Loans of Banking Financial Institutions (hereinafter referred to as the Notice), which established a concentration management system for real estate loans of banking financial institutions. This is after the regulators introduced the “three red lines” of new rules for real estate financing, real estate finance policy again out of the heavy new rules. The Notice, and this notice is implemented from January 1, 2021, which means that it is now officially in effect.
At the end of 2020, China’s central bank and the CBRC jointly issued a notice asking banks to tighten mortgage loans (online image)
The main meaning of this notice is simply to set “two red lines” for the “real estate loan scale ratio” of major banks. These two red lines are “real estate loans to the upper limit” and “personal housing loans to the upper limit”.
Large Chinese banks (such as the common four major commercial banks, etc.) have the highest ratio of real estate loans to 40%, while some medium-sized banks (Ping An and China Merchants Bank, etc.) have a ceiling of 27.50%. In short, the smaller the bank level, the smaller the percentage of real estate loans that can be issued.
The central government wants to regulate the property market, the first thing to crack down on is the money entering the property market, and bank loans are the first to bear the brunt. 2020 in September, there are rumors that banks are required to “new housing-related loans” this year accounted for “all new loans” ratio can not exceed 30%. The company’s main goal is to provide the best possible service to its customers. And now this rule is officially out.
According to the central bank’s monetary policy implementation report, by the end of the third quarter of this year, real estate loans accounted for 28.8%, and personal housing loans accounted for 19.8%. Although the overall did not cross the red line drawn by the central bank, so some people have hastily concluded that the loan-to-value ratio of real estate is currently safe overall, there is no risk, do not be frightened by the central bank’s policy. So is this really the case?
Leaving aside the fact that Construction Bank and Postal Reserve Bank, as well as China Merchants Bank and Industrial Bank, have crossed this red line, this is still happening under the impact of the epidemic that hit real estate last year. If China’s economic recovery accelerates next year, resulting in overheated property investment, what if the loans exceed this red line? This possibility is very high. So, to set such a red line in advance is to prevent a significant flow of credit funds into real estate. And in the past, the proportion of real estate loans in China has indeed skyrocketed, with 60-70% of the banking system’s annual new loans from 2015-2017 pouring into the housing market. This also validates the need to limit the flow of loans into real estate this time.
The meaning is obvious, that in the future, bank real estate loans and personal housing loans, are capped and may not be breached. The development loans of real estate developers as well as the housing loans of families are restricted to death, so to speak, and this is the big kill move.
Why the sudden restriction on the proportion of loans in the banking system? In fact, the central bank’s announcement has made the purpose clear. Note this sentence: “To enhance the ability of banking financial institutions to withstand fluctuations in the real estate market and prevent potential systemic financial risks arising from excessive concentration of real estate loans in the financial system,” which translates into human terms to say that the risk of real estate has become increasingly high, to prevent the collapse of real estate to the banks to the ditch.
Over the past two decades, China’s real estate has soared, causing many people to form the illusion that China’s property market will go up forever! Just like the illusion that has now formed that the U.S. stock market will always be bullish, a belief has been formed. So, many people put all their money into it, and many add Archimedes-style leverage, lest they make a penny less than others. But they do not see the risk behind doing so, do not see that the property market and the stock market can not defy the laws of the economy and keep going up. Even in the economic depression under the epidemic, regardless of the fact that asset prices are driven by the printing of money and water, or have an unwavering faith in the property market, which is prone to problems.
We see a phrase in the notice this time, “to enhance the ability of banking and financial institutions to withstand fluctuations in the real estate market”. What do you mean by volatility? Do you realize this whole problem? Upward fluctuations of course no problem, banks and the property market are all happy, for example, the more active cities in the south, Shenzhen and Dongguan, took the champion and runner-up in the growth of the property market in 2020. But note that this is talking about the cities in the south. What about when we look at the cities in the north? Whether it’s the big cities Tianjin, Beijing, Shijiazhuang, or the small and medium-sized cities Qingdao, Langfang, Jinan, the casual drop in second-hand housing last year is more than 10%, Tianjin’s drop was more than 20%, Langfang even waived. Is this downward fluctuation also considered volatility? What if the future fluctuation to the southern cities like Shenzhen and Dongguan? Can families with unlimited leverage to buy houses withstand such fluctuations? Can banks that use property as collateral for mortgage loans withstand such fluctuations?
Not only is the risk clearly told in this document, but the Chairman of the CBRC, Guo Shuqing, has also repeatedly mentioned the risk of over-concentration of loans in banks this past year. Guo Shuqing recently wrote another article pointed out that, at present, China’s real estate-related loans accounted for 39% of the banking sector loans, and a large number of bonds, equity, trust and other funds into the real estate industry. It can be said that real estate is the biggest “gray rhinoceros” in terms of financial risk in China at this stage, and we should resolutely curb the real estate bubble.
Chairman Guo’s data is of course more reliable, he said that China’s real estate-related loans account for 39% of the banking sector loans. Moreover, these are only bank credit funds, if you count the bonds issued by real estate enterprises, financing equity, and property trusts and other channel business and other shadow banking funds, how much money is flowing into real estate nationwide?
In addition to this there are many hanging sheep’s head to sell dog’s meat funds, many are also secretly flowing into the real estate. For example, consumer loans, business loans, credit card cash and so on some wild speculation in real estate. The case of credit card speculation has been told to everyone many times, typically the family of Ou Shenniao with an annual income of only 300,000, went to loan more than 10 million to speculate in Shenzhen houses, the annual mortgage repayment up to 800,000.
Directly with business loans to speculate on housing is also very common, last year the economy was hit more seriously by the epidemic, many foreign trade enterprises can not continue, so many small bosses and other private business owners, the use of the government to encourage banks to concessions to real enterprises, support the loan funds of real enterprises, to illegal speculation. Shenzhen house prices last year two waves of pulse-type rise is the result of illegal inflow of funds speculation. Dongguan not to mention the real economy is dismal, but the price of housing in Dongguan around Shenzhen actually won the title of runner-up in the list of increases, where do you think the money is from the past? A variety of business loans and consumer loans are credited.
So, if you add these funds using consumer loans, business loans and other kinds of irregular inflow of real estate, as well as off-balance sheet of various trusts, securities and other gray funds, real estate access to funds, very likely to have exceeded 50% of the financial system. This is a very scary ratio, far more than the 39% of credit funds that Guo Shuqing said, really accounted for half of the world.
Looking at the history of financial development over the past century, real estate has historically been the trigger for financial crises, and this has a lot to do with the mortgage model for buying a home. If home prices go up, this mortgage relationship is healthy and the collateral does not impair in value. But once home prices fall, there is a risk that the collateral will not be worth enough and additional collateral will be needed. If the homeowner chooses to cut off the mortgage at this time, the bank’s risk will be dramatically magnified, typically by the U.S. subprime mortgage crisis that brought down Lehman Brothers, Freddie Mac, Fannie Mae and other financial institutions. Of course, there was also The Japanese economic crisis caused by the skyrocketing housing prices in Japan. These are not far-fetched examples. President Guo of course understands the power in between, so last year kept ringing the alarm bell, following the three red lines of debt for property developers, and now the introduction of a mortgage ratio of two red lines, is to prevent China’s real estate step Japan, the United States housing market dragged down the banks, to prevent this gray rhinoceros led to China’s financial crisis.
In the past, the world has produced a total of more than 100 financial crises, 80% of which are related to real estate. The most recent one was in 2008, so now the banking system is directly suppressed by means of administrative orders, directly through the lending ceiling red line, which is equivalent to putting a tightening spell on the banks. Many times the more recessionary the economy is, the hotter this kind of speculation on real estate using high leverage becomes. Coupled with the Chinese obsession with houses, with more than 50% of financial capital flowing into real estate, the negative effects of this kind of high-risk speculation on real estate can’t be overstated.
The central regulators are actually wary of the fact that real estate can impact the financial system. In the China Financial Non-Performing Assets Market Survey Report (2018) released in 2018, a stress test report was done on the Chinese banking system. The report showed that the banking system would be under significant pressure if housing prices fell by 20-30%. That is to say, this is basically the tipping point at which the banking system can withstand stress. That means, of course, that it is possible for the Chinese property market to fall that much. It’s actually a sandbox projection in advance.
Now it may have almost reached such a tipping point, so the central bank’s CBRC is urgently introducing measures to limit the proportion of real estate loans to bank loans. Of course, this restriction is also intended to prevent money from the property market from emptying out what little residential savings remain and derailing China’s plans for an internal consumption cycle.
On the last day of 2020, the Communist Party’s central bank and CBRC suddenly issued a notice on centralized mortgage management. Several points can be introduced here: last year’s mortgage data has already made the central bank and CBRC feel uneasy, and the concern about the real estate gray rhinoceros dragging down banks is getting heavier, so this measure was urgently introduced. At the same time, suppressing the inflow of funds into real estate may leave funds for next year’s government as well as corporate bond issuance, bank loans if they all flow into the property market, the bond market next year how? Government bonds and corporate bonds no one to buy, may lead to the risk of local financial bankruptcy, but also may happen than the 2020 permanent coal bond default greater bond risk. Of course, the infrastructure that drives economic growth also needs money, and consumption also needs money. The overall funding is limited, with only five lids. But to cover ten buckets, there are too many monks and too little porridge to eat. This is the main reason for the central bank, the CBRC to enlarge the move. This bucket of ice water splashed down, the southern property market next year, the space to rise is basically limited to death. Whether it will follow in the footsteps of the northern cities, it remains to be seen!
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