Mortgage Rates Soar as 36 Trillion Yuan Credit Wave Expected

Two days a go we wondered, with Stimulus Coming: Will China Lose Control of Real Estate Market?

Now there are fresh concerns after one securities firm estimated lending capacity could explode in the second half of 2018, to the tune of 36 trillion yuan or roughly $5 trillion.

Banks are already hiking interest rates (40 percent above benchmark in Beijing) and down payments (70 percent for second homes in Shenzhen) because credit demand is high, but lending capacity constrained. What happens when capacity rises?

iFeng: 媒体：楼市调控还是银行钱紧？ 36万亿信贷在路上

It has become a hot topic in recent days for commercial banks across the country to raise the interest rate of first home mortgages. The first home loan interest rate has generally risen by 15%, and some regions have even raised the down payment for second-hand houses to more than 50%. What's more, there are individual banks in Beijing, and the first home loan interest rate is raised by 40%.

From the perspective of bank supervision, the core reason is that the bank has no rice. Due to the constraint of capital adequacy ratio, there is an upper limit on the generalized credit growth rate of commercial banks in theory.

In theory. Modern banking is not based on fractional reserves, but on the desire to borrow. Borrowers increase money supply and lending creates its own reserves. The central bank steps in during cyclical downturns that threaten to bankrupt the system, it "monetizes" by turning credit into fiat (but these days its only a higher form of credit), and the system resumes growth. After the 2008 crisis, lending growth did not resume in many developed countries. In the U.S., total credit market debt outstanding is growing at rates slower than in every recession of the past 60 years.

China solves the problem of lending growth with hard limits (lending quotas). As a result, there have been numerous lending violations. In the wake of the 2008 crisis, state-owned enterprises with no business in real estate created real estate divisions. They had far easier access to capital and real estate was growing much faster than their core businesses. In other cases, the SOEs became loan sharks, taking out huge loans and then re-lending at higher rates to real estate developers. See this 2012 post: Sinopec Sichuan sales office: King of the loan sharks? Usury scandal may be the tip of the iceberg. By 2014, the steel trading credits were exploding. Steel traders were taking out excess loans to lend at high interest or to speculate in real estate. See: Steel Trade Lawsuits Explode; Banks' Unceasing Nightmare; Defendants Flee. Then came the copper lending scandals. Borrowers rehypothecated copper collateral for loans from multiple banks, but the bigger story was Chinese borrowers were stockpiling copper because it was good collateral. Proceeds from a copper-backed loan could be lent at high interest or used to speculate in real estate.

In the wake of all this, China allowed the shadow banking sector to take over and it largely supplied the market's credit needs. Then late last year, following the leadership transition in October, the government finally started following its deleveraging talk with action. Shadow banking is contracting and lending is moving on-balance sheet. But banks are credit constrained.

However, with the recent implementation by the central bank of adjusting the MPA parameters and appropriately relaxing the capital adequacy assessment requirements, bank credit will be released in the second half of the year. According to Huachuang Securities' calculation, if the structural parameters and credit-cycled contribution parameters are relaxed, the bank's general credit growth rate can reach the upper limit, and an additional 36.73 trillion credit line can be released.

Although the additional 36 trillion credit scale is only a simple theoretical measure, considering that real estate loans are still the most important part of the current new loans. Of the new loans in the first half of 2018, 39.2% came from real estate. Obviously, after relaxing the capital adequacy ratio, credit funds will be preferred in the real estate industry, and the tension in housing will be greatly eased. In any case, real estate is still the key to steady growth!

Theoretically, banks could substantially increase their rate of credit growth, double or even tripling it if the maxed out their ability to lend.

What's happening on the ground? Interest rate increases and higher down payments are becoming more extreme as credit demand meets tight capacity. Real estate regulations are also failing. Some cities are experiencing "upside down" housing markets because most restrictions are on new housing, not existing homes. In more than a few cities, lower quality existing housing sells at a premium to new housing right beside it. In response, Hefei raised the down payment on a first-home mortgage to 50 percent if it is for an existing home. Except these stories to multiply in the second half as rising credit meets central planner's intensifying home price suppression efforts.

1. Beijing's individual bank first-home loan interest rate rises by 40%

Recently, the first-home loan interest rate of some outlets in Beijing has risen by 40% on the basis of the benchmark interest rate, and some of the bank's first-home mortgage interest rates have risen by 30%. However, the first mainstream is still based on the benchmark interest rate, which is 10% higher. The second-home mortgage interest rate is still 20% higher than the benchmark interest rate.

2, Hefei Construction Bank existing-home down payment increased to 50%

Yesterday, in Hefei City, Anhui Province, the local construction bank existing housing down payment increased to 50%. At present, the interest rates of the first home loans of Shanghai Pudong Development Bank, Bank of Communications and China Everbright Bank have also risen to 20%. And the threshold for buying existing housing is getting higher and higher. At present, the Construction Bank has made it clear that the down payment for existing housing has been raised to 50%. However, other banks have not followed up. Now only the existing housing of CCB has increased.

3, Fuzhou first home loan interest rate rose 15%

In the past few days, a number of banks in Fuzhou issued notices of an increase in mortgage interest rates. Some bank loans for the first home loan rate rose 15%, and the second suite rose 20%. Among them, the Bank of China's first home loan interest rate increased from the benchmark interest rate of 10% to 15%, the second home loan interest rate increased from the benchmark interest rate of 15% to 20%. The first home loan of Guangfa Bank rose 15% from the benchmark interest rate, and the second home loan rose 20% to 25% from the benchmark interest rate. Everbright Bank also raised the first-home loan by 30% from the benchmark interest rate, and the second-home loan rose by 35% from the benchmark interest rate.

4, Shenzhen first suite interest rate all rose 15%

At present, the first home loan interest rate of Shenzhen Commercial Bank has generally risen by 15%, and Everbright Bank has the most upswing, reaching 30%, and currently it is basically not taking orders. At the same time, many banks are in a tight position and lending is slow. Among them, the first suite interest rate of the construction bank Shenzhen Branch's housing loan was adjusted from the benchmark interest rate by 10% to 15%, and the second suite to 20%. At this point, the interest rates of the first suites of the four major state-owned banks, China Merchants Bank, and CITIC Bank in the Shenzhen mortgage market have all risen by 15%, and the second suites have risen by 20%.

All signs point to ample credit demand in the market, which leaves bank balance sheet capacity as the main restraint.

Capital adequacy ratio is an important factor limiting bank mortgage

Obviously, in July, banks across the country have already raised the first home loan interest rate to more than 15%. From the perspective of bank supervision, the core reason is that the bank has no rice. Due to the constraint of capital adequacy ratio, there is an upper limit on the generalized credit growth rate of commercial banks in theory. A series of new regulatory policies, such as the MPA assessment, have made it necessary for banks to conduct business and have more on-balance sheet capital, which has increased the demand for capital.

According to the transition period of the new regulations of the China Banking Regulatory Commission, by the end of 2018, the capital adequacy ratio, the tier 1 capital adequacy ratio and the core tier 1 capital adequacy ratio of systemically important banks shall not be lower than 11.5%, 9.5% and 8.5% respectively. On the basis of each one less than one percentage point.

According to the disclosure of China Banking Industry Development Report (2018), the capital adequacy ratio of state-owned big banks is basically flat, such indicators of small and medium-sized banks generally decline, and the capital adequacy ratio of individual non-listed banks is not even up to standard. This is also an important background for the recent advancement of IPOs in banking stocks.

At present, there are 19 banking stocks listed in the queue, 8 of which are rural commercial banks. Together with the rural commercial banks that are preparing to start IPOs, the number of rural commercial banks preparing to return to A shares will reach about 20. Judging from the data in the first half of the year, there are currently 28 banks issuing more than 80 billion yuan of secondary capital bonds, an increase of nearly 20 billion yuan over the same period of last year, and most of them are still dominated by agricultural business.

What do regulators do in response? Ease capital adequacy requirements.

The central bank is already reducing capital adequacy assessment

Yesterday, brokerage Chinese reporters verified from several sources that some central bank branches have been implementing the requirements for adjusting MPA parameters to appropriately relax the assessment requirements and promote banks to increase credit supply. The indicator of relaxation is mainly to reduce the partial parameters of the capital adequacy assessment to a certain extent. As of now, it is not known whether the relaxation of the MPA assessment is open to all banking financial institutions.

The adjustment of the structural parameter α is reduced to 0.5, but the standards of different regions and different financial institutions are not the same. In addition to the structural parameter α adjustment, the credit-periodic contribution parameter β will also be adjusted to varying degrees. This parameter is also for the macro-prudential capital adequacy ratio C* formula.

The research of Huachuang Securities shows that according to the current capital adequacy ratio evaluation standard in the MPA assessment system, it is not the absolute level of capital adequacy ratio of commercial banks, but the actual capital adequacy ratio (C) and macro-prudential capital adequacy ratio of commercial banks. The difference between (C*). The so-called macro-prudential capital adequacy ratio C* is a new evaluation index of the central bank in the MPA assessment system. The calculation formula is: macro prudential capital adequacy ratio C*=structural parameter α× (minimum capital adequacy requirement + system importance addition) Capital + reserve capital + countercyclical capital buffer).

It can be seen that the structural parameter α and the credit-period contribution parameter β are important parameters in the capital adequacy assessment criteria, and the reduction of both will cause the calculation result of the macro-prudential capital adequacy ratio of commercial banks to decrease, resulting in The requirements for the assessment of capital adequacy ratio of commercial banks are reduced.

One securities firm estimates lending could increase 36 trillion yuan under the new regulations.

Adjusting MPA is expected to release an additional 36 trillion credit line

According to the calculation of the fixed income department of Huachuang Securities, it is expected to release an additional 36.73 trillion credit line.

Huachuang Securities estimates:

If the value of β is lowered from the current 0.4 to 0.8 to 0.3, more than half of the banks' general credit growth rate can reach the upper limit, releasing huge credit space.

If the value of the structural parameter α is adjusted from the current 1~1.1 to 0.5 in the previous media report, it means that whether it is a systemically important institution or a general institution, the generalized credit growth rate can reach the upper limit, and the current Compared with the requirements of regulatory indicators, it can also release a large amount of credit supply.

To put it simply, since the general credit growth rate of commercial banks has generally fallen below 10%, if the structural parameters and credit cycle contribution parameters are relaxed, the bank's general credit growth rate can reach the upper limit (systemically important institutions 28%, 30%) 33% of ordinary institutions, from the perspective of broad-based credit (excluding off-balance sheet financing), can release an additional 36.73 trillion credit line (based on a simple estimate of general credit in June 2018).

The Chinese government wants lending to flow to productive businesses, it wants increased lending to small and medium enterprises. It has wanted this for a decade and hasn't gotten it. Will this time be different? Even before this announced monetary easing and fiscal stimulus, Chinese officials and official media were sounding the alarm. See: Housing Chaos in 30 Cities, Crackdown Coming in Second-Half. Officials seem to have stoked demand with housing lotteries. Some have already thrown in the towel on regulatory creativity and gone straight to price controls.

Officially, China says it doesn't want to flood the market with liquidity. Unofficially, it sure looks like a significant easing. Either way, Chinese investors are taking it as a signal that real estate (and I suspect A-shares to follow) is about to take off.

As for the yuan, the wildcard remains the U.S. dollar. Pumping more credit into the economy exacerbates the ongoing dwindling of reserves relative to implicit claims of credit and fiat yuan. At some point, Chinese savers may begin pulling assets out of banks and putting the cash into A-shares, more housing, gold, or they'll find a new loophole for capital outflows. Everyone is looking outside of China for currency risk, lately focusing on the trade war and retaliatory currency devaluation (which hasn't happened yet). The real risk is onshore.