Monday, August 13, 2012

Negative equity in Wenzhou and Japanese "lending in the dark"

Of course the money was borrowed. From family, from bosses even. Real estate speculators in Wenzhou of China are facing negative equity
According to one real estate speculator in Wenzhou, speculators obtained about 70% of their funding through banks and/or shadow banks, Yicai reports. According to the report, prices of newly completed properties in Wenzhou have fallen by about 30-40%. As a result of that, about 80% of the speculators are now probably in negative equity (i.e. the outstanding debts are larger than their real estate investments). Some creditors are demanding repayments, and flats are being repossessed by banks and creditors in some case. Some speculators simply ran away.

Meanwhile shadow lending in Japan may be on the rise soon.
Loan-Shark Lending Surge Feared In Japan
Lured by a tabloid newspaper advertisement offering a “heart-warming” credit plan, he went to the building the lender shared with tenants including prostitution agencies in Tokyo’s bustling Shinjuku district. With the door of the eighth- floor office locked behind him, he said he took out his first yamikin loan: 50,000 yen at 27,000 yen interest a week, which works out to 2,800 percent a year. “To repay loans from a non-bank, I borrowed money from a yamikin,” Yoshida said, “and to repay that, I borrowed from another yamikin.”

Soon he owed money, debts mostly in the range of 50,000 yen, to 96 loan sharks all over the Japanese capital. Illegal lenders called him and threatened his parents’ lives if he missed payments. They also recommended he sell one of his kidneys, Yoshida said.
The opposition Liberal Democratic Party’s financial committee in May unveiled a plan to scrap the part of the law that limits credit to a third of a borrower’s income, and to lift its current 20 percent cap on loan interest rates to 30 percent.
By the way, the Liberal Democratic Party is neither Liberal nor Democratic, it's conservative.
Taira, whose family owns a small vegetable wholesaler with 3 billion yen annual revenue, said in an interview. “What we need is increased counseling to protect people with heavy debts.”
He really thinks it's feasible to control appetite for debt through counseling rather than pricing?

Given the extremely poor returns in an ultra long term low rate environment, you'd think 20% interest would already be enough to generate enough volume in credit.
Tightened regulations helped reduce the number of debtors with at least five unsecured, unguaranteed loans from consumer- finance lenders to 440,000 people in March from 1.7 million five years earlier, Financial Services Agency data show. Loans from such firms, including Acom (8572) Co. and Aiful (8515) Corp., declined 40 percent over five years to 26.1 trillion yen as of March 2011, according to the data.
“Decisive regulation tackled the social issues very well in the late 2000s, dealing a blow to yamikin lenders,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo. “But the remedy carried an economic side-effect that’s driving lawmakers to seek a revision. Mom-and-pop business owners who want quick, short-term cash haven’t been able to borrow as much as they used to.”
The person, who asked not to be named because of his association with the organization, said he used to lend money to small-business owners at rates ranging from 5 percent a month to 10 percent a week. Dressed in a pinstriped suit and missing his little finger, he said he found it harder to collect on loans after the crackdowns and passage of the various laws. Now, he said, he’s concentrating on making money from other lines of business, including trading stocks.

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