Photographer: Johannes Eisele/AFP via Getty Images

IMF Knocks on Doors in Quest for Intelligence on Chinese Banks

  • Senior official queries property developers on contracts
  • Biggest five banks have reported subdued profit growth

As part of the International Monetary Fund’s biggest review of China’s banking system in half a decade, a top official recently did some detective work that didn’t involve an Excel spreadsheet.

On a trip to the mega-city of Chongqing in the nation’s interior, Ratna Sahay, acting director of the IMF’s Monetary and Capital Markets Department, visited a property fair. Her objective was to learn more about typical real-estate sales transactions, amid rising risks of property bubbles across the world’s No. 2 economy.

After talking with developers, she came away with mixed feelings.

"The first thing I asked was can I pay in dollars? And they said ‘no,’" Sahay said in an interview in Hong Kong last week. "They didn’t want my dollars, so that was good."

Accepting a deal in a foreign currency could have been a sign of diminishing confidence in the yuan, which has slumped to the weakest in six years against the dollar this year amid continuing outflows of Chinese capital.

On the other hand, Sahay picked up on unusual risks that property buyers in China may be facing. The IMF official heard that a purchase would require an immediate down-payment of 30 percent, followed by the total amount within months, even before being able to move in to a newly built property.

Sketchy Contracts

"I asked, ‘when will you deliver’ and they said, ‘in the next year or year-and-a-half.’ I said ‘what if something happens?’ They said, ‘we will give you some of the money back.’ I said, ‘would I be able to get back my whole deposit? And they said ‘no.’ So that I felt was quite interesting. It’s an example of how vulnerabilities exist."

The IMF’s review is still in its early stages and Sahay hasn’t reached any conclusions from her review so far. The study, called the Financial Sector Assessment Program, is scheduled to be completed in mid-2017.

Sahay said China’s officials are aware of risks and noted that local governments have already introduced curbs on speculative buying.

"They have strong buffers, both fiscal and external," she said. "They have a lot of resilience."

That resilience may come in handy, given that home prices in China’s four biggest cities have soared as much as 32 percent this year, according to calculations compiled by Bloomberg. The gains have fueled fears of a property bubble that could leave the nation’s banking sector saddled with bad loans and in need of a government bailout if it bursts.

With authorities rushing out measures to cool demand, the rapid price increases and regulatory response have evoked comparisons to last year’s epic stock-market meltdown -- and emboldened bearish views on the Chinese economy even as growth holds up in official tallies.

Surging mortgage lending and rising defaults by property developers underscore fragility concerns. Almost half of the record 10.2 trillion yuan ($1.5 trillion) of new loans in the first nine months of this year went to mortgage credit.

Haitong Securities Co. warned in September that Chinese households now rely on loans for more than half the value of home purchases, compared with one-third in 2013. The leverage level was even higher than the U.S. in 2007, it found.

Sahay and her IMF colleagues toured seven Chinese cities over the summer. The trips to Hangzhou, Wenzhou, Fuzhou, Chongqing, Shanghai, Beijing and Shijiazhuang featured meetings with officials from the central bank, banking regulator, local governments, banks, trust management companies, brokerages, real estate developers, state-owned companies and academics.

"We typically don’t visit different regions during our missions," Sahay said. "But China is special in that it is a very large and dynamic country with many provinces undergoing changes, and we wanted to make sure that we capture the nuances across the regions."

In a sign of pressure on lenders, the nation’s biggest five banks reported combined profit growth of only 0.8 percent in the third quarter from a year earlier. Industrial & Commercial Bank of China Ltd., the nation’s biggest lender, posted a 0.2 percent profit decline.

Reining in corporate debt and overcapacity will be key, Sahay said.

"The fundamental issues that they need to tackle are the loss-making corporates and excess capacity," Sahay said. "When you resolve that issue, the other problems will start diminishing."

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE