Chinese regulator vows guidance to help address mortgage default risks; ‘tougher regulation urged to clog loophole’
Published: Jul 15, 2022 12:02 AM
A file photo shows a pedestrian walks past the headquarters building of the People's Bank of China in Beijing, capital of China. (Xinhua)

A file photo shows a pedestrian walks past the headquarters building of the People's Bank of China in Beijing, capital of China. (Xinhua)

Coincidentally, Central China's Henan Province, a major agricultural production province that blazed the trail of the country's village banking push and that was the birthplace of Evergrande founder Xu Jiayin, has been in the news lately, as troubles at several local village banks and multiple local undelivered property projects, according to market observers, flag the need for a tougher stance on regulation over rural banks and presale homes.

Inadequate oversight of village bank operations and developers' presale funds have been pinpointed as central to the isolated incidents that also sparsely occur in other provinces, experts claimed. They called for continued efforts to bridge any remaining loopholes and address weak links in the domestic banking and housing regulatory framework. 

This, adding to an unwavering endeavor to battle corruption in the financial sector, will surely beef up the overall financial robustness, analysts have claimed, arguing against Western media overhyping risks with the country's banking system. In a fresh injection of confidence, the country's banking and insurance watchdog vowed late Thursday to ensure project delivery, as it's keenly watching the issue surrounding defaulting mortgage repayments.

Describing the incidents as representing only a fraction of the entire banking sector and total mortgage loans, the analysts based their sobriety on compelling estimates and numbers that portray a safe and sound financial landscape at large.

What's behind the incidents?

Although Henan didn't make a list of the initial six provinces including Southwest China's Sichuan and Northeast China's Jilin to be selected for a trial rural banking program in late 2006, the central province has over the years had fast-tracked building up its village banking footholds as part of a wider push to finance rural households and small and micro-sized businesses.

Under the program, rural banking institutions would fall under the purview of principles of low barriers, wide access and strict regulation and the creation of village banks was a big part of the trial plan.

By 2011, there were 23 newly built village banks in Henan, making it the second-quickest nationwide, or the fastest in Central China in building village bank presence, according to media reports. Two of the five banks that have recently been spotlighted in the village bank incidents - four in Henan and one in East China's Anhui Province in which depositors have reported difficulty in withdrawing money from the banks - were established in 2011.

As of the end of 2021, the country was home to 1,651 village banks, or 36 percent of all banking institutions in number terms, China Business News (CBN) reported in late June.

Henan was third-placed on the national village bank rankings with 86, behind East China's Shandong Province and North China's Hebei Province that had more than 100 such banks each, according to the same report.

"The supervisions on the banks, especially on the village banks, are far from sufficient in my point of view. The branches of banks have put the business performance as the top priority, always expanding while ignoring the lawyers' advice on compliance and risk control," Weng Guanxing, a lawyer from Shanghai-based law firm Wintell & Co, told the Global Times on Thursday.

More details about the village bank incidents offer clues to a lax regulatory mechanism that has failed to troubleshoot unruly operations despite rules in place that are supposed to serve as a firewall against violations. 

At a media briefing in May, the China Banking and Insurance Regulatory Commission (CBIRC) reputed the Henan village bank incidents as not simply an issue with transactions between average people and village banks, but implicating other entities and other complex deal structures. 

A local business group called Henan New Wealth Group was identified as a major stakeholder in the village banks, which took advantage of third-party platforms or so-called "fund brokers" to collect public money, the CBIRC said, speaking of the company's suspected criminal violations. 

Nonetheless, the wealth company is not on the list of publicly available shareholders of Xuchang Rural Commercial Bank, the initiator of the affected village banks, media reports claimed, suggesting an opaque structure of these banks that tend to complicate scrutinizing efforts.

As the 2007 interim regulations for village bank management stipulate, village banks are barred from loaning beyond their places of registration and wealth management products are excluded from their scope operable businesses.

The recent incidents have seen depositors from across the country complain over the failed cash withdrawals and have raised contentions over whether their deposits, largely enabled through online platforms, actually fall under the category of financial products, apparently indicating non-compliance with the 2007 regulations. 

Relevant regulatory authorities have evidently been asleep at the switch when it comes to oversight of village banks in Henan, Dong Ximiao, chief researcher at the Zhongguancun Internet Finance Institute, told the Global Times on Thursday.

It seems that the sporadic occurrence of risk incidents involving Henan village banks over recent years, albeit many of these cases isolated to specific localities, hasn't prompted local regulatory authorities into sufficient and timely actions to address the loopholes in the first place until the recent incidents draw public attention, Dong said.

"China's macro-prudential supervision system is increasingly facing challenges from implementation of micro governance system, as well as from evasion of supervision using cross-region fintech," Chen Jia, a research fellow at the International Monetary Institute of the Renmin University of China, told the Global Times.

According to Chen, the monitoring and governance of capital source and flow are important for China's overall situation of preventing and dissolving systematic financial risks. "It's a battle that is underlined by lasting determination and strong technologies," he said.

In the case of defaulted mortgages, inadequate oversight of presale funds was partly attributed to a flurry of yet-to-be delivered housing projects. 

More than 100 real estate projects in 18 provinces, including Henan and South China's Guangdong Province, make up a list of projects exposed to mortgage defaults, Tianmu Media based in Hangzhou, East China's Zhejiang Province reported on Wednesday.

Henan, where Xu, founder of cash-strapped property giant Evergrande was born, topped the list with more than 30 projects, according to a widely circulated screenshot of the list. Some of the affected projects were shown to be Evergrande-branded projects. 

Theoretically, a small portion - purportedly 5-10 percent - of the presale funds ought to be held in designated regulatory escrow accounts, but some developers were said to have misappropriated the funds to finance their new projects or repay debts, consequently weighing on project deliveries.

Xi Junyang, a professor at Shanghai University of Finance and Economics, said that it's still not clear which side is to blame for these housing loan issues, but banks might need to take some responsibilities for not thoroughly making risk management plans concerning such loans. 

According to Xi, banks should realize that the risks of loan repayment for pre-selling houses are much higher than existing home sales, and need to implement relevant risk management plans.

For example, they should keep the ratio of such loans to a very limited percentage, while making it clear in the contracts as to how to cope with the loans if developers fail to hand over the houses timely. 

Banking sector still in good shape 

Experts stressed that such cases are unlikely to cascade into large-scale systematic risks for China's banking system, whose risk management mechanisms are generally deemed strong enough to withstand unexpected losses. 

A ramped-up push to fix regulatory loopholes, adding to continued efforts to fight against corruption in the financial system, is set to enhance the overall banking sector resilience and robustness, they noted. 

One recent example was the public prosecution of Cai Esheng, former vice chairman of the country's banking regulatory regulator, who was charged with taking bribes and abuse of power. 

Zhao Qingming, a veteran financial economist, told the Global Times on Thursday cases like the Henan village banks' default show that financial risks often break out in a concentrated way in certain regions, but they are unlikely to extend into large-scale systematic risks.

"The loan provision rate by domestic large and medium banks, mostly above 150 percent and sometimes even 300 or 400 percent, are generally enough to cover non-performing loans or other risks," Zhao said.

The risks might be tougher for small and micro banks, many of whom don't have capability to set up a risk management system, but the proportion of village banks only accounts for a very small amount of China's overall banks in terms assets size, Zhao said. 

The vast majority of small and medium-sized banks in China remain within safe limits in terms of central bank ratings, Sun Tianqi, chief of the central bank's financial stability bureau, told reporters on Wednesday.

The country's financial risks are generally controllable, with 99 percent of its banking sector assets within safe limits, Sun said. 

As of the end of 2021, banks boasted assets of 345 trillion yuan ($51.26 trillion), accounting for 90 percent of the total financial assets, Sun disclosed, speaking to the need for a steady banking sector and for financial stabilization.

In an effort to address concerns among certain depositors who have reported difficulty in withdrawing money from the affected village banks, local banking and insurance regulatory authorities in the two provinces have responded with plans to advance deposits for people initially with combined assets of no more than 50,000 yuan apiece, media reports claimed.

Analysts also said that bank shares losses on Wednesday and Thursday amid reports about suspensions in mortgage repayments are indicative of an unfounded market overreaction.

In response to defaulting mortgage repayments due to delayed project delivery, the CBIRC vowed to anchor financial institutions toward handling risks in a market-oriented manner, the state broadcaster reported late Thursday.

The CBIRC said it has taken note of delivery delays for certain developers' projects, the key to which lies in "ensuring deliveries," which the regulator is watching closely. 

The regulator pledged to coordinate with housing authorities and the central bank to support local governments in ensuring project delivery, protecting the public interest, and structural stability.

As of the end of 2021, delayed deliveries in 24 major cities made up 10 percent of the total in terms of sales areas, China Fund News reported on Wednesday, citing domestic real estate consultancy CRIC China.

Even in the most pessimistic scenario, delays to property settlement would account for only 5-10 percent of the nation's total,  according to CRIC China, which put the scale of potential mortgage defaults at 360 billion yuan ($53.48 billion) to 730 billion yuan nationwide. 

This would equal a default rate of 0.9-1.9 percent of the nation's total outstanding mortgage loans over the first quarter of 2021. Such an outcome could barely trigger a "systemic impact," the consultancy said, speaking of the risks associated with defaults on mortgages.

At least 15 major domestic commercial banks have moved to check the amount of loans involved in the loan repayment halt and published notices to clarify that the incident won't exert detrimental impact on their business. 

The Agricultural Bank of China, for example, issued a notice saying that the bank's amount of overdue mortgage loans involved in the stalled property projects amounted to about 660 million yuan after a preliminary assessment. The volume only accounts for about 0.012 percent of the bank's total mortgage loans. Therefore, the involved business scale is small and the entire risks are controllable, the bank noted.

The Industrial Bank Co also noted that the amount of loans involved in the stalled project incident at the bank was 1.6 billion yuan, and borrowers have started to halt repaying 384 million yuan of them. The bank said that the total (halted payment) scale is relatively small and would not exert huge influence on the company's operation.

The Hengfeng Bank also refuted rumors of bankruptcy on Wednesday with post of a statement on its official Weibo account. The bank said in the statement that the bank's risks are controllable, while its business situation is steady and showing signs of improvement.