Peer-to-peer (P2P) lending for property investment in China grew by an alarming 163% last year, underscoring just one of the factors behind recent heat in some of China’s largest property markets.
According to Bloomberg, citing research from the Shanghai-based Yingcan Group, P2P housing loans grew more than six times faster than that traditional bank lending in 2015, seeing the amount of property-related loans extended by P2P lenders balloon to 115.5 billion yuan.
While the industry is still in its infancy — accounting for less than 1% of China’s outstanding 21 trillion yuan in housing debt — the rapid growth in non-traditional lending underlines the increasing risks associated with China’s latest housing boom.
“Borrowing money from banks is indeed very difficult in China, even if you have a property yourself, because they are carefully managing their risks,” Xu Hongwei, chief executive officer of Yingcan told Bloomberg. “That leaves room for the development of peer-to-peer lending.”
Though P2P lending opens up additional avenues for Chinese investors to finance property investment, recent evidence suggests the practice is fueling a fresh wave of risky, speculative-driven investment.
Take borrowing funds to secure a housing deposit, for example.
Forget about scrounging and squirreling away in order to save for a housing deposit, P2P lending removed the need for prospective home buyers to make these sacrifices, allowing investors to borrow the initial deposit in order to get additional financing to secure a home purchase.
Essentially, leveraging up without putting any money down. A risky outcome in anyone’s language.
In order to stamp out the practice, the People’s Bank of China (PBOC) and the China Banking Regulatory Commission (CBRC) are reportedly drafting rules to end the practice, helping to reduce risks that are building in the nation’s tier one property market.
“The rules will bar lenders including developers, housing agencies, small-loan companies and peer-to-peer networks from offering loans for down-payments,” unnamed sources told Bloomberg.
P2P financing is helping to build risks in the housing market as well as for investors financing the investment.
Late last year China’s banking regulator, the CBRC, announced that it would place tougher restrictions on thousands of online peer-to-peer (P2P) lenders operating in the country, stating that firms would not be allowed to take deposits from the public, pool investors money or guarantee investor returns.
The tighter restrictions followed many instances of fraudulent activity that led to a wave of failures across the industry in recent years. At the end of November last year, of the more than 3,500 online lending platforms operating in the country, 1,000 were classified as “problematic” by the CBRC.
Crucially, the ruling was implemented to prevent P2P lenders from financing stock market investments, not those for housing.
Less than three months on, it hasn’t taken P2P lenders long to move from one asset class to another, mirroring the broader switch away from stocks to property in the wake of last year’s stock market collapse.
The question now is whether these speculative elements in the property market will lead to a similar scenario seen for stocks.
The risks appear to be building, as was the case with equities in the early parts of 2015. High risk loans financed by high-returning investments with money being funneled into a market that has seen home prices in some major cities jump by more than 50% in the last 12 months.
While that doesn’t automatically imply that China’s property market will implode, the elimination of loosely regulated financing firms from the sector could only help to miminise the risk of that occurring.
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