Beijing Red Capitalist Overlords Losing Battle Against Credit Bubble Speculators—Desperate Developers Promoting Zero Down-Payment Mortgages

China bulls point out that that home prices in China are based on fundamentals and 30% don payments are proof there is no real estate bubble.

In reality, much of those “cash” down payments are borrowed in various ways in China’s shadow banking system, now estimated at $7 trillion.

Bloomberg reports China No-Money-Down Housing Echoes U.S. Subprime Loan Risks

China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis.

Deals skirting government requirements for minimum 30 percent down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers.

“The risk is severe for developers and third parties because there is no commitment from home buyers,” said Ding Shuang, senior China economist at Citigroup Inc in Hong Kong. “Zero down payment has appeared in the U.S. before. It basically enabled unqualified people to buy houses,” said Ding, who used to work for the International Monetary Fund.

“We need to see whether this will become widespread,” Ding said. “For now, it seems still sporadic.”

Sales Sliding

The practice threatens to add to the build-up of risks in China’s $7 trillion shadow banking industry, with developers or third parties arranging funding to cover down-payment requirements, according to Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd.

China’s home sales slid 10.2 percent by value in the first five months of this year, the statistics bureau said today. The Shanghai Stock Exchange Property Index rose 0.3 percent as of 2:09 p.m. local time, paring this year’s decline to about 4 percent.

In Guangzhou, in the southern province of Guangdong, nearly 20 housing developments rolled out no-down-payment plans to boost sales, Nanfang Daily, Guangdong’s official Communist Party newspaper, reported in April, as government agencies in Guangzhou and Shenzhen issued warnings against the practice.

“‘Zero down payment’ can’t solve home buyers’ problems of shortages of funds, and it has to rely on unconventional practices such as paying the down payment for the customer at high interest, or fraudulently inflating the property price to swindle banks out of loans,” the Urban Planning Land and Resources Commission of Shenzhen Municipality said in an April 10 statement.

Shadow Banking

Credit data released yesterday showed the government reining in shadow banking while allowing higher bank lending to support a faltering economy. New yuan loans exceeded forecasts at 870.8 billion yuan ($140 billion) for May.

Poly Real Estate Group Co. is letting buyers delay full down payments at its Central Park development in southeastern Nanjing city, the official China News Service reported June 6. Buyers can pay deposits of 50,000 yuan and then 15 percent of the home price in three months’ time. The smallest unit is about 70 square meters and costs about 1.2 million yuan, the report said.


“We need to see whether this will become widespread,” Ding said.

I propose it already has, that cash down payments are borrowed from friends and families, and besides, China’s property bubble is headed for a bigger collapse than 30%.

The price of these homes is insane compared to income levels. In that regard, the China bubble is far bigger than the US property bubble.

Marc Faber Sees `Gigantic’ Credit Bubble in China

Marc Faber, publisher of the Gloom, Boom & Doom report, and Ian Bremmer, president of Eurasia Group, talk about U.S. initial public offerings by Chinese companies, the economy of China, the outlook for U.S. stocks and bonds, and investment strategy. They speak with Trish Regan on Bloomberg Television’s “Street Smart.”

Faber sees sharp slowdown in China growth, and a “gigantic credit bubble” in China, and a bubble in US equities. I agree on all counts.

Mike “Mish” Shedlock