Special Report- The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance

See all the latest news about China's Shark Loan Scheme at China Shark Loan




By now, everybody seems to know that China has a giant housing bubble (See: 50 Facts about China’s Bubble Economy).

It is clear that artificially low interest rates and massive money printing by the government is fueling this bubble. But few know about the engine behind the monuments bubble- A giant shark loan ponzi scheme.

Beside that, we didn't find a lot of people who agree with our prediction from 11 big surprises for the next decade:

 China Bluff Exposed, Regime Overthrown- China's communist regime continued to print money, lending it to everybody that wanted and didn't want it. The giant housing, infrastructure, and manufacturing bubble came to a violent crash when the debts where not paid and inflation forced the authorities to tighten despite massive unemployment. The combination of high inflation and high unemployment in the urban centers took the people to the streets. The Chinese citizens refused to accept state intervention in the economy and their personal life demanding more personal and economic freedom resulting in prolonged civil unrest which almost reached a full scaled civil war. The collapse of the Chinese regime and economy resulted in a colossal bust for commodity prices, albeit temporarily and caused a severe recession in Australia, Brazil, Russia, Argentina, and the Gulf States.

In this article we will show  how the ponzi shark loan scheme works and why we think the regime in China will fall. Our research is based on sources INSIDE CHINA

This is how this Ponzi scheme works:

Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Most of the funds that are collected in this classic ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.

Angry crowd gathered in the street of jishou city , in this city, 85% of households  participated in the illegal fund scheme.

A reader wrote to us this email two weeks ago, which trigged are in depth research:







“My hometown is zhejiang, now I live in shanghai, my sister pledged her home to bank, she lived in hangzhou, she bought her home around 500,0000rmb five years ago, now her home worth 2million rmb, so she can get huge loan from bank, she gave this loan to a shark loan company with 30% return every year, she has been doing and living on this for 4 years, she is a middle school teacher, she earned 4000rmb per month, but with this lending arrangement, she has been able to buy a car, the interest income is 6 times of her salary, One of my cousin's father lost all his principle of 4 million since one scheme blow up in 2008. That is my personal experience. 2 months ago I went back to my hometown in new year, this is 3 tier city, but many so investment companies shop in the street, and in 2009, I saw the so called investment companies( shark loan) opened in the town level, I visited four small towns, I saw there is shark loan shop in every town. China media is controlled, so you can’t find many negative exposure, but if you dig a little bit deep, by doing some search for shark loan in Chinese, you will find out how serious the problem is. In my home town a 150 million ponzi scheme blow up in 2008, the leader turned himself in after he paid all the local official leader in full, and he felt safe enough knowing he will be protected, but my cousin's father was not so lucky for his 4 million, since he do not get his money back. Some people compare this bubble to Japan, to be fair, what happened in China real estate, the madness, the greedy, the loan shark with 100 % interest rate, it is much, much worse. “

So China’s real estate market is a huge ponzi scheme supported by shark loans. Ordinary Chinese pledge their houses to get low interest loans from the banks, then lend to local shark loan companies at high interest rates to speculate in the real estate market. Actually, at the later part of 2008, when real estate prices dipped for while in China, many ponzi shark loan schemes blew up, in cities like heilongjiang province , he gang, hunan province, ji shou, zhejiang province , and li shui. In il shui the whole city was rioting since many households couldn’t get the principal back after the local loan shark companies couldn’t pay interest anymore due to the real estate price slump.

A bank run in jishou city as result of a ponzi scheme that  blew up, the local people say " here we have bank running, we can not withdraw money anymore in every local bank. Many people committed suicide as a result.




According to different sources by the end of this year, the collapse of the shark loan companies will be much worse since the bubble got much larger. And it has the potential to bring whole system down.



This is what a local Chinese had told us:

“90% of the households participate in the madness of loan shark real estate ponzi scheme, in 2008, when the real estate dipped due to the financial crisis, people blocked the railway track, sit in the front of government buildings , since local government officials are supportive of this gdp growth scheme. “

A source in China wrote to us yesterday:

“I began to realize the serious of the shark loan problem by the later part of year 2008, since my brother's family is in the loan shark business for more than 6 years, but I only returned to my home town during new year one time, I spent most of my time in shanghai. It is hard to find out about this underlying issue since it is in the black market, and most rampant in 2, 3 tier city, shanghai property and developer has been working together with the loan shark to flip flop the real estate, but most fund sources are actually from second tier and third tier city. Each time I met them, they will mention something, but not in detail, so that didn’t raise a red flag. My sister in law is keen in flip flop real estate and she is making quiet a lot of money, after opening a shop a couple of years ago, she really does not care what the borrower does, but she will check the background and ask for personal guarantee. Around two year ago. My sister also told me pledged her house and borrowed 1.20 million from bank, then lent to loan shark companies run and got 20% interest each year.



See all the latest news about China's Shark Loan Scheme at China Shark Loan

We have received another email which describes similar issues:

“One year ago, my cousin called me, mentioned that his brother in law lost 4 milllion to the loan shark in a 150million local blow up scandal, and during 2009 new year, i learned from my brother, that his family is lucky enough to withdraw the fund before that leader turn himself in to the police. These loan shark schemes are everywhere, in every province in china. The hunan jishou city riot was covered up, but no one told the true story. But the youtube video tell the truth, the reason for the jishou city riot was that around 85% households in that city participated, and it is a poor inner-land city, many people lost livelihood, and the government officials actually encouraged this fund raising activity after they visited zhejiang coast city to copy its development model.”

A search of “Shark Loan” in Mandarin in Google, gets 1.8million hits, if you browse through these returned pages, and if you know Chinese you will see that this black market of shark loans is everywhere, in almost every city, town or village in China. And there are adds everywhere, in local newspapers , in the streets and on the internet .


To see the results of “Shark Loans” in Chinese click Google and Baidu.

A few adds were picked up during a google search:

1) short term loan, difficult house pledge loan

Shanghai yusong, first hand fund source, 3% monthly interest loan. Simple procedure, same day loan ,

13167283806 Manager Zhou

http://www.qingsongdai168.com/

2) Shanghai local official loan , 24 hour approval

http://www.xueertagege.blog.163.com/



3) urgent need of money? Check out us, lowest monthly

http://www.qingsongedai.com/



Readers should be aware of the fact that this is a black market so the big funds that drive the land speculation and real estate projects, with group purchases of development units can’t be found on the internet.

A bank run in west of hunan, ji shou city, police everywhere, the local government threatens the local people to prevent them from accepting the media coverage. The locals block the rail track


So many ordinary households pledge their inflated houses and get a loan from the bank, then lend the money to a shark loan operator with 20-150% annual interest rate, this shark loan operator then lends this aggregated loan to real estate developers, speculators, or some SME which has to pay back the bank. ( China’s banking system operates at a roll over loan base on a year on year base, so many Chinese SME's will borrow at shark loan market rates to pay back the bank, then days later, use the approved new bank loan to pay back. This is a very common practice, given the dire situation of many SME exporters due to razor thin profit margins combined with rising labor costs. Furthermore, in recent years, many SME’s totally stopped their old business of exporting , since the high return of real estate drove more and more of them into this historical bubble.

The CBOC is scared of a real estate “hard landing”, decided not to raise interest rates. Instead, they decided to ask for more property taxes, in face of sky high inflation, which is much higher than official figure. In fact, the bubble became so large in the last year precicaly because of their attempts to “save” the real estate market in 2008.

During the 2008 financial crisis, when many real estate companies were failing under the financial stress, the government changed the minimium equity which is needed in order to liquidate the house and get cash . In every city there is a local City construction bureau chief ( every city has this powerful bureau, that controls the land, the city plans, and the construction bidding). Those officials held meeting with every available developer active in the city, and demanded that they will not drop the price. Under the government support and the backing of funds from local banks, the developers were able to survive.
 It is clear that the Chinese government will do everything it can to support the real estate market, because it is the life blood of the regime. But only this time the old measures will not work anymore.The private money that supported by the loan shark ponzi scheme already reached to the peasant level, and the small town level so the ammunition is out. Their is nobody else left to join the ponzi scheme.  State banks can’t afford to loosen up again, otherwise, runaway inflation will kill the social stability. So this time is different, the real estate market will collapse in China.

It will be the perfect storm for China, since combination of the labor unrest, the bankruptcy of China's private SME's,and the death of the old business model will take down the regime(See:The collapse of the Asian growth model )


From what we understand from sources in China, more than 50% of local private SME's are already financially bankrupt since 2008, and they survive only because of this scheme, as they get new loans from state owned banks. The local banks know this, but they are afraid of stopping the new loan programs , since that will cause massive unemployment, and civil unrest. Like every ponzi scheme the economy is like a drug addict, and that is why the SME’s will pay such a high interest rates.

The local Private SME's are dying, especially manufactures and exporters and their current razor thin profit do not allow them to raise salaries. The only companies that can actually make money in China are Monopoly SOE's, real estate developers, and some western companies.



Compared to last year, residential rents are up 15percent in BJ, SHANGHAI, while food prices are rising at a pace of 15-20%. Food prices rose very fast during Q1, although they now they seem to have moderated a bit. According to local newspapers in China, the electricity, and water bills may rise soon.

An email we received about the unemployment in China:

I can’t give you an accurate percentage since no one will have this in china, but i knew for new college graduate this year, i read a report, mentioned that only 15-20% being able to sigh the employment contract. and last year is horrible, my personal street smart observation told me : it is around 30%. i found out more and more so called security personal in the park, in the street in shanghai, most of them are middle age local unable to find a decent worker, so the local government hired them for this token job with 1000 plus month salary. so if you understand me, 1500 rmb per month in shanghai, it is not a job at all. And so many people dropped their ordinary work, close their factory to join the real estate speculator team. The danger of the burst of the bubble is unimaginable.


See all the latest news about China's Shark Loan Scheme at China Shark Loan





This condition has a large potential for civil unrest and a regime change, as we predicted in 11 big surprises for the next decade.  A Chinese reader wrote to us about the civil unrest:

“From internet chat room, and the feedback from some breaking news, for instance, the killing of court judge, the killing of police, the killing of school kids, maybe 95% percent feedback are anti government. small scale social unrest are lot, but the local government has been able to kill it at very early stage fast to prevent spreading. In a city in jiangshu province, a middle school student crossed the street, and bumped into the mirror of a car, the driver of the car slapped the face, and his wife cursed the kid very loudly, and he said something he is the leader ( in chinese, "lindao"), thousand local people congregated, block the car, block the police car, block the fire fighter, then the military police is out, it is going on till middle night, no one being able to rescure the driver and quell the crowd. And the local city party leader come out, in a loud speaker: "I promise you that the this driver ( it turns out that he is the chief of local tourist bureau) will be terminated from his position right now". From the tens of thousand of feedback from internet chat rooms to this news, 98% feedback are anti government. The dangerous thing is people began to distrust the government, it can be observed in the local stock market. People began to lose the good feeling, the confidence. The market failed to play the catch up after US and people feel that government failed them. The local government s will kill any unrest at grass root at early stages in couple of days by mobilizing the military police and blocking the media. But now the only popular support is the economic growth, the only justification, and as I mentioned before, now the real estate is the pillar of china local economic dream, if this pillar collapses, the only popular support is gone, then a small incident will trigger large uncontrolled social unrest. The real estate crash will almost bring  death to the government in 2-3 years, I knew many people will not believe it, but people will lose their money, their livelihood, combined with the reality of high unemployment and stress towards rampant corruption, it is high probability."

The government loud speaker: the loan shark fund scheme is illegal, blocking the railway is illegal, he will be punished. gov will try to mitigate the lose of local people, if you block the railway, you will be severaly punished.


And we will end with a last email from another reader of ours:

“I am amazed of how western bankers and main media keep ignore this obvious danger, the vested interest is so powerful, even in cbnc, the paid ad from real estate developer is running at greater frequency, this is truly disgusting, the truth is if you are walking down street in china, ask every one, everyone will tell you: china real estate is crazy, even drop 50%, the price level is still beyond ordinary wage earners purchasing power.

We encourage all of our readers to send us more stories, pictures and videos at Israelfinancialexpert@gmail.com