Chinese developer's zero-interest loans highlights industry risks

China's third largest property developer, Evergrande Real Estate, has joined smaller peers in offering zero-interest down payment loans, a practice reminiscent of the US housing boom that precipitated the global financial crisis.

The easy credit shows the gamble Chinese developers are willing to take to keep sales on track, but also highlights the risk of a broader industry correction if buyers default. Such defaults have been rare in China, where household debt is low by Western standards and banks have traditionally required hefty deposits from buyers seeking mortgages.

Many analysts believe the slowing property sector poses the biggest risk to China's economy in the second half.

Guangzhou-based Evergrande's loans skirt government rules that require a minimum deposit of 30 per cent, while buyers who have put down as little as 6 per cent upfront would find it easier to bail if the market turns.

Data released on Wednesday showed real estate investment slowed in the first half and new property construction plunged.

In June, mortgage lending rose 6 per cent from May to 117 billion yuan (HK$147 billion), compared with monthly growth of 2.5 per cent in May.

Liao Qun, chief economist at Citic Bank International, said interest-free down payment loans increased the risk of default, but that the scale of such promotions remained small.

"Developers have seen their liquidity deteriorate as collections from presales have declined, because banks were not granting mortgage loans easily and developers had to provide instalment plans to attract buyers," said Agnes Wong, a Nomura credit analyst in Hong Kong.

Some China property executives shrugged off comparisons with the "subprime" bust in the United States, citing China's low household debt ratio.

"It is not in the Chinese culture to take on too much debt," said James Macdonald, the Shanghai-based head of Savills Research China.

"In China this is not the case at the moment as the market is pretty soft."