In China, where do you think most or all of the money from those 30% to 60% down payments mentioned in Part 2 go? For a first-time property sale, the government owned banks loan the money to private citizens or businesses to buy property owned by the government. Once the loan is complete, the down payment and the amount of the loan flows to the same or another government owned bank and then the buyers make payments with interest to the government owned bank that holds the loan.
When re-sales of these properties take place, the first mortgage on the leased property is paid off and the second loan is either 70% (for a buyer’s first home) or 40% (for a second home).
Thirty percent of property in China is bought with cash.
Due to the high required down payment, the risk to China’s government owned banks is much less than the risk in the US private sector banking system, which really has no risk, since the government often steps in to make up for the losses in the private sector while ending up increasing the national debt.
In China, even when property values drop, the bank, which the government owns, may repossess the property (that the government always owned) and resell it. This means after a property has dropped 50% of its value in China, the government may lose either 30% or 10% of the value of the loan. In the US, if a bank cannot re-sell the house at the current value, then it losses all of the value of the loan.
However, when the same property that was repossessed is sold again, the down payment will be between 30% to 60% in addition to the fact that 30% of property sold in China is bought with cash.
In the long run, will the government owned banks in China make a profit or a loss?
Continued on January 14, 2012 in The Economic Health of BRICS – Part 4 or Return to Part 2
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Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.
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