Underground down payment loans cast a shadow over government’s efforts to curb property lending

Chinese home buyers can still easily borrow down payments on properties, despite the government’s efforts to crackdown on the practise.

Various types of financial platforms continue to be used to allow down payment loans, which experts say is making it increasingly difficult to measure just how large a problem property debt has become.

The Chinese regulators rolled out a raft of new rules nationwide in March to bar lenders including developers, property agencies, microcredit firms and peer-to-peer networks from offering loans for down payments, to curb speculative activities.

The practise disappeared for a while, say expects, but it never fully went away.

A sales representative surnamed Guo at Logan City, a large property project in Huizhou, a southern Chinese city near Shenzhen, said it has a partner who can provide help with down payments, “up to a maximum 15 per cent of the total purchase price”.

But for the privilege, borrowers have to pay a whopping 14 per cent annual interest rate.

The developer’s partner firm is a peer-to-peer lender, run by Shenzhen-based property agency World Union.

New home prices in Shenzhen have soared nearly 50 per cent in the past year, raising concerns over the amount of speculative money poured into Huizhou.

Most Chinese cities now strictly require a minimum 30 per cent of the total price as a down payment for first-time buyers. But being able to borrow a 15 per cent down payment from a P2P lender effectively means that total individual borrowing is extended to 85 per cent of the purchase price.

Similarly, at Galaxy Dante, another popular residential development in Huizhou, sales executive Mr Lin told buyers that he could recommend a local micro-lender to provide financial assistance if anyone was worried about down payment – but he refused to reveal the name.

“This is not allowed by the government,” he admitted.

Over the past fortnight, 22 cities have further tightened their home-buying policies, ranging from raising down payment requirements, to halting home sales to non-local residents.

The authorities have also been underlining the national ban on down payment loans and related financing services.

But still it appears that many operators are flaunting the rules.

In some cases, down payment loans are being repackaged to look like other products.

Last month Caixin, a Beijing-based financial news service, reported that at least eight commercial banks were providing consumption loans to customers, with property as collateral, of up to 200 million yuan.

Consumption loans are normally given by banks to customers for one-off needs which may range from an medical emergency to their children’s education.

But much of the lending is simply being ploughed into property, despite being restricted to consumption, the Caixin report said.

It also reported the central bank called in representatives of the country’s 17 banks on Wednesday, including five largest banks, and ordered them to tighten scrutiny on housing credit and strengthen their risk controls.

Recently, an online advertisement for China Merchants Bank, which roughly translated, claimed: “No matter if you have an outstanding mortgage, as long as you have a house, we can offer you credit, to use on what you want”.

“These kinds of activities are adding leverage to the property market, and are hard to completely monitor and control,” said professor Yi Xianrong, a finance lecturer at Qingdao University, who was previously a financial researcher with the leading think-tank, China Academy of Social Sciences.

“There are a lot of loopholes in China’s credit system. Even though there are rules, people will break them or find ways around them,” Yi said.

New lending to households reached 675.5 billion yuan in August, according to official data, a nearly 50 per cent increase from July.

And as that growth in leverage accelerates, “we should be worried”, said Alan Jin, a property analyst at Mizuho Securities.

“Prices are so high now,” added Yi, “how many people can afford them? I fear the actual leverage is far beyond our estimates.”