Buyers borrow in US dollars in bet on a revaluation
Foreign investors in Shanghai's real-estate market are betting on more than rising house prices.
Demand has skyrocketed for dollar-denominated mortgage loans as offshore investors take advantage of cheaper financing and a potential currency arbitrage in what some believe is an inevitable upward revaluation of the yuan against the greenback.
HSBC officials say consumer interest in mortgages to finance mainland properties rose dramatically in November and December, capping a 100 per cent rise in the bank's mainland loan book from the preceding year. Most applicants are seeking dollar-denominated mortgages.
'Owing to speculation of [currency] appreciation, I would say 99 per cent of people have applied for mortgage loans in US dollars,' says Mike Yeung, HSBC's head of personal finance services in China.
In the first half of 2003, HSBC's mainland residential book saw US$33 million in new mortgages, up from US$20 million in the first half of 2002. Bank officials estimate the loan portfolio will double in six to nine months.
'This business has become very attractive in 2003,' Mr Yeung says. 'Now in Shanghai and Beijing they have a very active second-hand property market, particularly for those top-tier properties.'
Buyers can access financing through authorised banks in either yuan, US dollars or Hong Kong dollars. Yuan-denominated loans carry an annual interest rate of 5.184 per cent. Better rates can be obtained with US dollar mortgages. Mainland residents are not eligible for foreign-currency mortgages.
'The US dollar interest rate is 4 per cent and sometimes we can give a bit of a concession. On average we offer a 3 per cent rate,' Mr Yeung says. 'When it comes to mortgages [in yuan], we don't have much room to manoeuvre.'
HSBC says the loans are processed through its mainland office, but in most cases an applicant can receive a reply within two days. The maximum level of financing is between 60 to 80 per cent of the property's appraisal value, a figure roughly in line with Hong Kong practice.
Foreign passport holders do not need to be mainland residents in order to qualify for a China mortgage. HSBC says its mainland mortgage book is largely made up of Hong Kong, Taiwan and US residents.
Lawrence Law, HSBC's head of personal financial services in Hong Kong, says the processes of applying for a mainland loan are basically the same as those for a Hong Kong property.
'The standards of the property appraisal and credit appraisal are identical to Hong Kong,' he says.
Mr Law says growth in mainland mortgages has been strong recently, but he notes the business is relatively new and just beginning to rally from a small base.
The surge of consumer interest in dollar-denominated mortgages parallels ongoing dollar weakness which saw the greenback decline 14.5 per cent this year against a basket of major currencies measured by the Federal Reserve Trade Weighted Dollar Index. Analysts expect dollar weakness to continue throughout the year ahead, which could place additional pressure on Beijing to widen the yuan trading band. Shy of exchange rate liberalisation, another outcome may be dramatic inflation of yuan-denominated assets.
HSBC forecasts Asian countries will grudgingly accept currency appreciation later this year, with the Singapore dollar rising 2.20 per cent, the Thai baht 8.88 per cent, the Indian rupee 5.21 per cent, the Indonesian rupiah 6.32 per cent, and the New Taiwan dollar 2.28 per cent. Only the Philippine peso and Korean won are expected to decline against the dollar, falling 4 per cent and 0.55 per cent respectively.
