BANKING: Banks Finally Stand Up To Beijing
Bottom line: The refusal of many banks to follow a Beijing directive to support the sagging property market looks encouraging, and could show these state-run lenders are finally beginning to behave more commercially.
It appears I owe an apology to big Chinese state-run banks, after years of calling them policy lackeys of Beijing with very little commercial instinct. Just a day after criticizing top lender ICBC (HKEx: 1398; Shanghai: 601398) for making a blatantly political $4.3 billion infrastructure loan to Pakistan (previous post), a new report is saying a growing number of banks are defying a recent Beijing order to boost their mortgage lending to support the sagging domestic real estate market.
This kind of action certainly won’t please economic planners in Beijing, but it marks a huge step forward for the banks in their drive to become more commercial and earn some real respect from investors.
Let’s start by saying this particular rebellion by the banks is a bit of a no-brainer, and most western lenders would have taken similar action much earlier. That’s because China’s real estate market is extremely overheated right now and in urgent need of a correction — a fact that everyone knows, including Beijing. But central leaders are worried that a correction might be too severe and have ordered the banks to lower their lending standards for mortgages to try and “fix” the problem.
Now it seems that many of the banks are simply ignoring Beijing’s recommendations — a move that would have been unthinkable in the past. According to a new report, none of the 200 banks polled in a recent survey were offering discounted mortgages that the government had recently suggested as part of its efforts to support the stumbling real estate market. (English article)
What’s more, the banks weren’t giving discounts on mortgages to second home buyers, despite a previous suggestion by the central bank that such a policy was allowable. The survey even found that many of the banks were actually offering mortgages to second home buyers at rates that were above the benchmark level.
The central bank imposed many of the tough requirements on mortgage lending over the last 5 years in an attempt to cool the market when prices were rising rapidly. It is attempting to undo many of those policies now as prices have stagnated and sales volumes plummeted over the last year. But the banks, realizing the market is almost certain to head downward for the next couple of years, are finally getting smart and saying “no”.
This kind of situation happens frequently in the west, where real estate markets are more mature and undergo this kind of boom-bust cycle roughly every 20 years. During the busts, home owners often default on their mortgages when they discover they owe more money than the property is worth.
In China’s case, the risk of default is probably much higher since many property owners are speculators who don’t have the cash or income to actually pay their mortgages. Instead, most simply sold their properties for a quick profit in the past when prices were rising. But now that prices aren’t rising anymore, many of those will simply default as they quickly realize they don’t have the resources to pay off their debt.
All of this certainly doesn’t bode well for China’s real estate market, but the banks’ refusal to lower their lending standards marks an important step for this group because they know many new mortgages they make now are likely to ultimately default. Many of those banks are already suffering under big piles of bad loans made under orders from Beijing during the global financial crisis, and don’t want to subject themselves to a second round of more headaches.
From an investor’s perspective, this looks like very positive news, as it means the banks are starting to put their own financial welfare ahead of Beijing’s policy directives. That could be good news for banks that can make the transformation into commercial entities the fastest, though it could still be another 5-10 years before any such lenders emerges.
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