Monday, December 19, 2011

Those Mortgage Downpayments in China, They Be Borrowed

Sorry to continue to harp on this; it's a pet peeve of mine.

Nod of Approval for Black Lending
Niu Wei, marketing director for a start-up company, used a private lending firm to pay the down payment for her third apartment in Beijing. She had to make a down payment of 400,000 yuan ($61,538) in 30 days but only had 300,000 yuan ($46,153) on hand, including the money borrowed.

"I had already asked all my friends and family members, but still lacked 100,000 yuan ($15,380). Then a friend of mine recommended Creditease," Niu said. Niu provided her personal ID, monthly salary certificate and the property ownership certificates. Within a week, she got what she wanted at an interest rate of 1.42 percent per month, 18 percent a year.

The article also has a little overview of private lending:
Small credit companies charging 2.5-3% per month (backed by a mortgage)
Small credit companies charging 6.8-10% per month (no mortgage)
Peers and business partners 6-12% per month
Illegal banks, loan sharks, money launderers 70% per year (although that's not worse than the other at the extreme ends)

Like this article, there's been a lot of talk about the government banks turning their back on SMEs lately. Based on my reading, I think this is a bit of mythologizing. Banks report default rates to SMEs of 30-40%, so clearly they made some. These numbers always seem to raise up whenever orders come from the central government to make more loans, as a kind of shield, I presume. I suspect what has changed more is the interest rates on private lending have risen, making the gap between the official bank rate and the underground rate more painful. As borrowers have jumped from one lender to another, to cover the last loan's principal *and* interest, the risk premium has increased, and now all loans are unsustainable. I think this theory has some support in the risk premium in the interest rate list above, in the jump between 2.75% average to 8.5% average with and without collateral.

Some "historical" (2003, SO long ago...)
At the Mercy Of Loan Sharks
Although he had plenty of collateral in the form of sales contracts, machinery and inventory, lenders wouldn't grant him even a small line of credit. So potential customers, he fears, have gone to state-owned companies with better access to capital. "The government sees state enterprises as its sons, so it helps them," Mao says. "Someone else will drink up my market."
Ha, look at this kernel of inconvenient fact. I have not seen this so bluntly stated in the press this year unless someone is quoting Chanos:
China's four biggest banks are technically insolvent because they are owed an estimated $500 billion in nonperforming state-enterprise loans, but 70% of their new loans still go to state companies.
The article mentions pawn shops lending at up to 5.7% per month (with collateral like industrial machinery or a luxury car) That was the only interest rate number I could find in 5 pages of google articles.

This is how shadow banking runs its course. The lenders think intimidation substitutes for wise lending and there is always another loan shark to lend again, to cover that loan and unpaid interest. Until there isn't.

1 comment:

jesse said...

The uncollateralized risk spread is interesting. Many will accept other forms of collateral, not just mortgages.

Loansharking is a big business in Taiwan too, not just China.

Good post.