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China’s shadow lending system may be trying its hand at sub-prime banking. And if China’s real estate market goes, it will be just what George Soros continues to be warning about since January as he announced he was shorting the regional currency, the renmimbi.

The China Banking Regulatory Commission said on the weekend that Shanghai banks cannot cooperating with six mortgage brokers for around 4 weeks for violating lending policies. Branches of seven commercial banks admitted on Monday that they will suspend mortgage lending for clients brokered by those six firms for a couple of months in an effort to clamp down on 房貸, the Shanghai office of the Commission said.

It’s unclear exactly what China means with the “gray market”, however it does appear like mortgage brokers and their partner banks work with time to acquire investors and first-timers right into a home as China’s economy slows.

If it is happening in Shanghai, think of the interior provinces where there is a housing glut and they tend to be more dependent on the real estate business for revenue.

The central and western provinces have already been hit hard from the slowdown of your whole economy and consequently, existing property supply may be a hard sell, Macquarie Capital analysts led by Ian Roper wrote inside a report paid by Bloomberg on Monday. Another wave newest housing construction won’t assistance to resolve the oversupply issue over these regions, and mortgage lenders may be using some “ancient Chinese secrets” either to unload them to buyers or fund them a bit more creatively.

To a few observers, this looks a lttle bit excessive like precisely what the seeds of your housing and financial disaster all rolled into one.

The creative products which wiped out U.S. housing in 2008 — known as mortgaged backed securities and collateralized debt obligations bound to sub-prime mortgages — was really a massive, trillion dollar market. That’s untrue in China. But that mortgage backed securities market is growing. As they are China’s debt market. China’s debt doesn’t pay a hell of any lot, so some investors searching for a bigger bang may go downstream and look for themselves in uncharted Chinese waters with derivative products full of unsavory property obligations.

Chinese People securitization market took off just last year which is now approaching $100 billion. It is actually Asia’s biggest, outpacing Japan by three to just one.

Leading the drive are big state-owned banks just like the ones in Shanghai which have temporarily shut down access to their loans from questionable mortgage firms. Others within the derivatives business include mid-sized financial firms trying to package loans into collateralized loan obligations (CLO), which can be different than CDOs insofar since they are not pools of independent mortgages. However, CLOs might include loans to housing developers dependent on those independent mortgages.

China’s housing bubble is different in comparison to the U.S. because — up to now — there has been no foreclosure crisis along with the derivatives market that feeds off home mortgages is small. Moreover, China home buyers must make large down payments. What led to the sub-prime housing industry within the United states was the practice by mortgage brokers to approve applications of those that had no money to put down on the house. China avoids that, in writing, simply because of its deposit requirement.

What exactly is not clear is the thing that real estate developers are implementing that policy, and who may be not. And in the instance where that kind of debt gets packed into a derivative product, then China’s credit gets to be a concern.

The market for asset backed securities in China has exploded thanks to a new issuance system. Further healthy development of financial derivatives will help pull a considerable sum out from the country’s notoriously opaque shadow banking sector and put it back on banks’ books, giving China more transparency.

But Shanghai’s crackdown this weekend implies that authorities are keeping a close eye on mortgage loan brokers whether or not the “gray market” will not be necessarily linked to derivatives.

Kingsley Ong, a partner at lawyer Eversheds International who helped draft China’s asset-backed security laws in 2007, called the opportunity of securitization in China “nearly unlimited”.

The absence of industry experience and widespread failure to disclose 房屋貸款 have raised questions regarding its ultimate impact on the broader economy.

All of this “eerily resembles what actually transpired throughout the economic crisis from the U.S. in 2007-08, which had been similarly fueled by credit growth,” Soros said during a meeting at the Asia dexlpky85 in The Big Apple on April 20. “A lot of the money that banks are supplying is required to keep bad debts and loss-making enterprises alive,” he stated.

That is true of housing developers seeking buyers and — perhaps — the mortgage brokers and banks willing to assist them to to help keep businesses afloat.

Rutledge told the China Economic Review way back in November there was really a real risk.

China’s securitization market took shape in April of 2005 but was suspended during 2009 as a result of United states housing crisis along with its link with the derivatives market China is presently building. Regulators lifted the ban on mortgage backed securities in May 2012, though they outlawed re-securitization products and synthetic CDOs, which are CDOs of CDOs, the uicide squeeze that helped kill lots of American banks including Lehman and Bear Stearns.