Stimulus Prep or Prelude to Deflationary Crisis: China Tightening Screws on Real Estate

The PBoC second quarter report admits the economy is still highly reliant on real estate and infrastructure. As I reiterated back in January and many times before and since, any stimulus effort will likely flow into real estate. Home prices rallied this year because some localities eased buying restrictions, but also on the assumption of second-half stimulus. The government and central bank recently reiterated that "homes are for living in, not speculating on" and that real estate would not be used to pull GDP growth higher.

The government has failed to stop credit flowing into real estate. It has failed to make it flow to SMEs and other favored areas. It hasn't been able to reign in steel production. China can't afford a real estate slowdown with no offsetting growth. It can't afford a stimulus that flows into real estate. Given no sign of stimulus at the moment, a successful crackdown will be visible in deteriorating macroeconomic data.

21st Century: 32个城市银行房地产专项检查 房企融资闸口再紧
Sogou: 32 City Banks' Special Real Estate Inspection, Housing Enterprises' Financing Tight Again

Banks in 32 cities including the first-tier cities and the second-tier cities are facing a special inspection of real estate business, and financing of real estate enterprises is facing stricter supervision.

On August 8, a reporter from 21st century business herald learned that the general office of the China Banking Regulatory Commission recently issued the Notice on Special Inspection of Real Estate Business of Banking Institutions in 2019 (hereinafter referred to as the Notice), focusing on the inspection of real estate business of banks in 32 cities in four major areas.

Several bank branches said that the supervision had already entered the premises to inspect the agency's real estate business, including development loans, operating property loans and mortgage loans involving commercial bills.

The "circular" said that it insisted on the position of "no speculation in housing" and severely punished all kinds of illegal acts of transferring funds into the real estate industry through misappropriation or diversion, and was highly vigilant against the real estate bubble and financialization.

Real Estate Financing Supervision Becomes Tighter

"The current real estate supervision is to control the right and left hands, the left hand is the supply and the right hand is the demand." On August 8, a bank insider told reporters that the supply side controls the financing of real estate developers, forcing them to speed up the push and increase the housing supply. The demand side controls the down payment and interest rate of house loans through measures such as purchase restriction and loan restriction.

From the supply side, real estate financing has been tightened continuously since this year. In May this year, the China Banking Regulatory Commission issued Document 23 to scrutinize five real estate businesses such as direct or disguised use of on-and off-balance-sheet funds for land leasing. This notice can be regarded as a detailed and upgraded version of Document 23 in the real estate field.

The circular requires that, according to the national sales price index of 70 cities in June 2019 released by the national bureau of statistics, and in combination with the list of key cities participating in the "one city, one policy" real estate pilot, this special inspection of real estate business includes 32 cities such as Beijing, Tianjin, Shijiazhuang, Qinhuangdao, Hohhot, Shenyang, Changchun, Shanghai, Nanjing, Suzhou, Wuxi, Xuzhou, Hangzhou, Hefei, Fuzhou, Jinan, Zhengzhou, Luoyang, Wuhan, Xiangyang, Changsha, Guangzhou, Chongqing, Chengdu, Guiyang, Kunming, Dali, Xi 'an, Ningbo, Xiamen, Qingdao, Shenzhen, etc.

"The 32 hot cities are basically the national real estate market's nose. If these 32 cities are stable, the national real estate market will be basically stable." According to Zhang Dawei, chief analyst of Centaline Property. Jiang Guojun, a researcher in Zhuge's housing search market, believes that the risks of real estate funds are relatively high in cities with relevant market changes, especially those with large price changes. It is expected that cities with obvious changes in subsequent house prices and frequent policy changes may be included in such supervision.

All housing-related credits are included in the inspection.

This inspection involves bank real estate-related loans such as land reserve loans, development loans, personal loans and housing lease loans.

Specifically, in terms of real estate credit business management, check the implementation of real estate credit policy and internal control system; The management of real estate development loans and land reserve loans, including concentration management, authenticity review of capital sources, implementation of minimum capital ratio requirements, enterprise qualification review, etc., as well as illegal financing of "four certificates" incomplete projects; Personal housing loan management, including the implementation of differentiated credit policies, the implementation of minimum down payment ratio and loan restriction policy requirements, the implementation of down payment funds authenticity and loan applicants solvency assessment and inspection, etc.; Housing rental loans. Including the cooperation with housing rental enterprises, the problem of bank credit obtained by intermediary agencies, the problem of misappropriation of rental loans, and the provision of funds for intermediary agencies, housing rental enterprises and other acts that disrupt the rental market.

The growth of real estate development loans dropped significantly. According to central bank data, 21st century business herald reporters estimated that in the first and second quarters of 2019, the real estate development loans increased by 660 billion yuan and 190 billion yuan respectively. During the same period last year, the increase was 700 billion yuan and 480 billion yuan respectively.

Judging from the balance, by the end of the second quarter of 2019, the balance was 11.04 trillion yuan, up 14.6% year on year, 4.3 percentage points lower than the end of the previous quarter. Among them, the balance of affordable housing development loans was 4.61 trillion yuan, up 12.9% year-on-year, 7.3 percentage points lower than the end of the previous quarter.

According to the Circular, another focus of the inspection is that non-housing related credit funds are diverted to the real estate sector.

Specifically, it includes: personal comprehensive consumption loans, operating loans, "down payment loans", credit card overdrafts and other funds misappropriated for house purchase, and other bank credit funds misappropriated for real estate in violation of regulations; Funds illegally flowed into the real estate market through shadow banking channels; Loans such as M&A loans and operating property loans are not carefully managed, and funds are diverted to real estate development; Provide financing for real estate development projects through working capital credit and operating property credit.

This is also the focus of current supervision and inspection. On August 9, the CIRC issued a fine of 22.2367 million yuan to China CITIC Bank. Among the 13 violations, they included issuing real estate development loans in the name of working capital loans and failing to include loans from real estate enterprises in the real estate development loans.

Real estate trusts plummet

The Notice also gives clear requirements for off-balance-sheet funds from banks to flow into real estate.

Specifically, check the supervision and management of interbank and off-balance sheet businesses, including the investment of bank wealth management funds in non-standardized assets in the real estate sector; Interbank investment risk review, capital investment compliance review and post-investment risk management for real estate enterprises or projects; Problems such as providing financing for real estate enterprises to pay land purchase fees directly or in disguised form, or providing support or channels with their own credit, etc.; To bypass illegal land reserve financing, enlarge government debt and other issues, illegally flow into the real estate sector in a multi-level nested way, and entrust loan funds to illegally use in the real estate sector.

A North China bank insider said that the above policy has long existed and the key lies in the implementation. For example, land reserve financing has long been earmarked.

Earlier, on July 6 this year, the China Insurance Regulatory Commission (CIRC) issued a message calling on some trust companies whose real estate trust business has increased too fast and too much recently to carry out interviews and warnings, requiring these trust companies to control the growth rate of their business and improve the level of risk control.

Some analysts believe that the scale and proportion of trust products invested in real estate has continued to rise in the past two years, while the scale of trust has shrunk under the supervision of access channels. The proportion of real estate in trust products rose from 8.4% at the beginning of 2017 to 14.8% in the first quarter of 2019. In the third and fourth quarters of this year, the pressure on the maturity of real estate financing is great, and it is expected that the net financing of real estate trust may also face pressure.

Judging from July, real estate trust decreased significantly. According to the data of usufruct trust, the issuance scale of collective trust products in July was 184.577 billion yuan, a decrease of 20.22% from the previous month. Among them, the real estate trust raised 58.425 billion yuan, down 19.63% from the previous month.