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From China’s Shark Loan Ponzi Finance- Understanding China’s Shadow Banking System
The five steps of a fake housing sale in China
1. Before the construction, loan shark operators provide initial finance to small or middle size developers in 2 and 3 tier cities in order to begin the construction.
2. After the construction is complete, and before the official sale to the public begins, loan shark operators will provide resident IDs and other fake documents for mortgage application to real estate developers and make together a fake sale contract.
3. The real estate developer brings the fake contracts to the bank in order to obtain a loan. That can explain why in China, many houses already get sold before they are opened to the public for sale, and why there are so many vacant houses already sold, which no one lives in. (According to the report by Fitch, that was mentioned above there are 64 million unoccupied homes in China)
4. A secret agreement is made between the shark loan operator and the real estate developer. The shark loan operator will get more bank loans through this fake sale, as will the real estate developer. They will use the bank loan in order to engage in another ponzi scheme.
5. The real estate developer and loan shark will hire people to fake sale frenzy in order to attract real buyers, and if there are enough sales the fake contract will be cancelled out.
During the time of the real estate bubble frenzy these ponzi schemes and fake sales were mostly covered, since real buyers could be found. But when the market slows down there will be a thin transaction volume, and the fake sales will be exposed. Then the real collapse will happen.
From China’s Shark Loan Ponzi Finance- Former Microsoft CEO in China is Under Investigation for Shark Loan Activities and Faking Commercial Real Estate Contracts.
He became famous recently due to the exposure of his purchase of a fake PHD diploma from Western Pacific University. He also claimed to have a PHD degree from California Institute of Technology in his Bio and numerous occasions. There is a hot debate on the Chinese web regarding Mr. Tang, who used to be a role model, and is now exposed to be a crook. On the other hand, in the fake goods capital of the world someone line Mr. Tang may as well be a role model.
According to the report, Mr. Tang is under police investigation for an alleged criminal corporation with real estate developers in Suzhou City. The police suspect that they faked a commercial real estate sale contract, which enabled him to receive a 112.8 million Yuan mortgage loan from a bank. Later, the loan has been lent out by the real estate developers and to loan sharks.
If you do a search for “Fake Mortgage Loan” in Mandarin in Google, you will get 298,000 hits; each hit will take you to an individual case, a news report, or a financial expert warning about potential financial risk.
Last time, we reported former Microsoft China CEO, Mr. Tang Jun was involved in a fake mortgage loan case. In that case, real estate developer colluded with Mr. Tang Jun to fake real estate sales contract to obtain more than 100million in loans from the bank, and it turns out this is standard practice in China’s real estate industry.
As I stated before, China’s banks are more than happy to issue low interest rate mortgages to the applicants as far as there is real estate collateral involved. During good times and bad times, many cash stripped real estate developers will ask the key company employees, relatives, professional real estate flip floppers, and loan sharks to provide their own ID or borrowed ID from the country side to fake sale contracts in order to obtain the mortgage loan before the actual sale. That can explain the “sold out phenomenon” prior to official sales, and also can explain the higher vacancy ratio and high “new sales cancellation ratio”
After they obtain the low interest mortgage loan, they often work with loan shark operators to lend out at very high private interest rates, as the “Tang Jun” case exposed.
China’s real estate market has degenerated into a tool to trick the bank to obtain lower interest loans, and then this massive easy credit will go underground under the loan shark operation. Many loan sharks will park their funds in real estate, and use real estate as collateral to borrow again from the bank. This is deadly cycle.
Many western investors will doubt about the popularity of this reckless behavior, of course, there is legitimate purchase, but local insiders know, that a very higher percentage of China’s real estate sales are fake sales. As long as house price continue to go up, the deals will get covered later by legitimate sales. However, once prices head south, and they can’t sell the houses it will cause a giant domino affect.
A few days ago, China’s media exposed an individual case in Beijing, a 700 hundred million “fake mortgage case” involving 8 Beijing bank officials and other 10 defendants.
For full story, please check this LINK
In this case, a 30 years old former real estate broker, that is now a loan shark worked with senior bank executives to use fake residents ID’s and fake real estate sales contracts in order to obtain 700 million Yuan of mortgage loans from Beijing Agriculture and Commerce Bank. In this case, bank presidents received tens of millions of bribes from the main ring leader. The criminal activity has been going on for two years. Later the corrupted bank president even began to fake business licenses in order to apply for 200 million small business loans to pay back the previous mortgage loan. Only a small accident triggered the end of scheme when one outsider bank clerk called the police and the case got exposed.
In the last five years China residential real estate prices have exceeded ordinary Chinese purchasing power. The market has become a vehicle for different groups of people by which they park their corrupt revenue. Of course, there always will be some real buyers, but many of these real buyers have been forced to pay these high prices and accepted the fate of house slavery , and as I stated in previous articles, their recent purchase are motivated by concerns of runaway inflation, and fear of future price hikes a result of the distorted banking system. China’s banks can’t afford to tighten further; otherwise, the whole system will collapse.
The people who park their money in real estate, regardless if they can even rent the property, is comprised of loan shark operators, real estate developers, corrupted local government officials and bank executives. China’s Real estate market is degenerating into is an effective tool to steal funds from state banks.
As I stated in The Harsh Reality behind China’s Growth Story
The root of the problem is the same: more loan growth can benefit the borrower, the banking executive, and the local government officials. The return of capital and the potential loss of the principal is always a secondary consideration, especially when the loans are issued to the state owned enterprises or well connected “too big to fail” private businesses. Who cares? The banks are state owned banks, and the capital is state capital.
More and more Chinese began to realize the dark side of the real estate industry, their anger towards the government is growing , and a lot of them have lost confidence in their political and economic future. Emigration applications to Canada, USA, Australia surged this year. And all these anger and emigration happened in a time when China’s economy is booming. Just imagine what will happen when China’s real estate market will collapse.
Many people doubt a possible collapse, given the fact that China’s government can order the banks to lend again. Actually, recent developments in China in later August show that China’s bank began to offer “Bank Trust Products” again after one month freeze period.
Future will tell how long the tread mill to hell can go on before it plunges into abyss.
During time of crisis, the rich and the powerful always jump the ship and get bailed out first since they receive information first. This is especially true in China, a totalitarian country with information censorship.
Ordinary Chinese already suffer under the current system. As I stated in previous articles, China’s economic development only benefits a selected few.
Click for dozens of video links of “fake mortgage loans” exposed in China’s media.
A few days ago Shanghai Local TV station reported a story about a new residential development site in Shanghai. This site has just opened for sale, but the majority of the units were already sold out. This “sold out phenomenon” is the result of false sales by real estate developers, professional flip floppers and loan shark operators.
There are three purpose for these false sales. The first is to obtain business for loan sharks (many local developers will borrow from loan sharks in order to develop the project. There will be secret sale contracts and lending contracts between them). The second is to obtain mortgage loan from the bank before the real sales to real customers begin, thus shifting all the financial risk to the bank. The third is to create a bull market appearance in order to lure the buyers.
If the real estate price drops, this kind of practice will get exposed, since the developers will not pay the mortgage loan anymore. This means the price drop will cause enormous damage to China’s banking system. As a result, a large part of China’s real estate industry is degenerating into a tool to steal state funds from state banks.
For the TV report, please click the link