A new report came out of Fitch Yesterday, stating that Informal Securitization is increasingly distorting credit Data, and has been under representing the actual amount of new loans in the first half of 2010: "Adjusted for informal securitization activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn...
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 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 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.
From China’s Shark Loan Ponzi Finance- As Chinese Banks Tighten Lending Standards, More Real Estate Developers and Households Take on Shark Loans:
"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 corporation 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 trust 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.
From China Shark Loan Ponzi Scheme- Interest Rates Soar to 50%
What happened in the 2008, when the Chinese real estate market cooled down for a few months is now happening again. More and more listed real estate developers in china tried to raise capital through secondary offerings, but most of them failed to raise sufficient funds due to a very weak stock market. So they are now at a full ponzi scheme mode as they work with the local banks and trust investment companies to issue trust products through which they sell to Chinese residents.
As stated above, a new report came out of Fitch Yesterday, stating that Informal Securitization is increasingly distorting credit Data, and has been under representing the actual amount of new loans in the first half of 2010: "Adjusted for informal securitization activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn...
Make no mistake these 1.3 trillion CNY, or 2.6 trillion annualized are not CDO stile products flooded the Western banking system during the boom years of 2002-2007, it is much worse. These are investment products that are sold and/or managed by trust companies that are basically shark loan operations that raise and lend money at rates that range between 15% and 100% annual rates. These loans are made on short term basis, between 1-6 months and are totally dependent on raising asset prices. With a rise in housing prices, not only will all Chinese banks collapse immediately, but thousands of such ponzi schemes will collapse across the country, potentially causing massive civil unrest.
Special note:
China's ponzi shark loan industry is a subject that was covered extensively in this site. If you want to understand the full scale of the story please go to China's Shark Loan Ponzi Finance section and read ALL the reports.
Fitch full report
Fitch on Chinese Banks; 7/2010
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