China’s Shark Loan Ponzi Finance- As Chinese Banks Tighten Lending Standards, More Real Estate Developers and Households Take on Shark Loans

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

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 jurastiction. 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 yongkang city, in zhe jiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. In li Every scheme has a ring leader who's 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.

China Times reports:

China’s Banking Regulatory Commission has formally called for the tightening of lending standards and for the suspension of purchases of third homes and a ban on the opening of new real estate trust funds. But that did not prevent the existing trust developers to continue to raise money.

“There is a new way in which real estate companies and trust companies can cooperate to help to raise funds from the private sources. They do that through the introduction of a trust portfolio scheme, which is financed by several enterprises that package together loans and form a good return on investment. We raise funds and then distribute the funds to various companies involved in packaging of the loan. A man in charge of such a trust told our reporter.

CITIC Bank’s CEO told reporters that many small developers are now beginning to participate in such Trust portfolio planning, and in this way, the developers themselves can also raise money.

Apart from trust companies, fund companies are also raising money and then lend money in order to Fund Small and medium enterprises.

"As long as developers paid for Land and development loans from the bank, we had competition , we could only help find extra of funds from private that added up to loans from the bank." A real estate fund official told our reporters. According to that source, since the current market rate of return on real estate is expected to be very high, the majority of the loan are being lent at a rate of 17% or more.

In addition, according to sources from the trust industry, although coroporation between such trusts and banks was banned, such cooperation still exists. There are still a large number of banks and Trust continues that engage in joint lending.

The trusts are lending wealth management products in corporation with China Construction Bank, China Merchants Bank, China Everbright Bank, Bank of Ningbo and a number of other banks. Other trust involved with the banks are Shandong International Trust and the Trustee, and the financial trust, Xi'an International Trust.

The banks agreed that the level of cooperation is too large, because the banks believed the products to have a large amount of financial products. The banks issued a letter entitled: “letter of bank cooperation.” The stated that the banks are well aware of the fact that the majority of the funds they lent money to still invest in the real estate business, but most banks and trust companies have taken action in order to minimize the risks. " The source told our reporter that despite what was written in the letter government instructions have not completely stopped the practices of major banks.

Chinese corporations, especially those involved in real estate, are desperate for cash and is apperantly one of the reasons for the underperomnce of the Chinese markets. These companies are selling most of their equity in order to stay solvent.

China Times reports:

A growing number of small and medium real estate developers are caught with liquidity problems. They are raising money from such funds, or selling equity in order to survive. Recently, the Shanghai United Assets and Equity Exchange announced that Shanghai Sheng Real Estate Development Co., Ltd. sold a 50% public stake in a listed debt transfer of 317 million Yuan, at a price of 68.6108 million Yuan per share. The initial assessment was a value of 385 million Yuan.

According to the company’s report, the stock transfer was made in order to provide funds the development of the company’s business in real estate, technology, capital investment, and it’s management support partners.

However, it is impossible for the company to operate due to its high debt burden. More than half of the land that the company purchased is not being developed and can’t be developed and so they turned to an emergency fund raising through the issuance of more stocks.

At present, companies such as Shanghai Sheng sold most of their equity in order to survive. This kind of action is very common in the last few months. Some developers are selling their land or real estate assets in order to survive as well. In June 30, Taiyuangangyu , love construction shares , ST Everest all announced that they will sell their real estate assets.

According to sources from the stock market, the current sale of shares of the companies involved is due to the high debt level and inability to develop land. In the present circumstances, developers are facing intense pressure due to the attempts of the government to cool the real estate market and the lack of financing capabilities.

China Real Estate Assessment Center has released a report named "2010 China Real Estate Research Report of listed companies," it stated that the bull market last year is coming to an end. Even though a lot of houses were bought with ample cash, the regulation tightening cycle and the credit tightening, combined with the high rate of debt will put house prices at the end of this year under enormous financial pressure.