China's 'no-money-down' practice echoes US subprime loan risks

Mainland homebuyers are being offered no-money-down purchases in an echo of the subprime lending that triggered the economic meltdown in the United States and the global financial crisis.

Deals skirting government requirements for minimum 30 per cent down payments have emerged this year from Guangzhou and Shenzhen to Beijing as property sales slump, according to state media and statements by government agencies and developers.

Loosening down-payment requirements could erode the mainland's financial stability by adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years.

Government warnings to consumers indicate that officials will strive to limit such arrangements, a sign of stress in a property market with a glut of homes.

"The risk is severe for developers and third parties because there is no commitment from homebuyers," said Ding Shuang, an economist at Citigroup. "Zero down payment has appeared in the US before. It basically enabled unqualified people to buy houses. We need to see whether this will become widespread. For now, it seems sporadic."

The practice threatened to add to the build-up of risks in the mainland's US$7 trillion shadow banking industry, with developers or third parties arranging funding to cover down-payment requirements, said Shen Jianguang, the chief Asia economist at Mizuho Securities Asia.