Author: Lee, Yun-sing Antony
Title: The growing mortgage market : opportunities for foreign banks
Degree: M.Sc.
Year: 2000
Subject: Mortgage loans -- China
Banks and banking, Foreign -- China
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Department of Business Studies
Pages: vi, 60 leaves : ill. ; 30 cm
Language: English
Abstract: The Chinese government has attempted to increase individual housing sales in a bid to boost the economy after the Asian financial crisis in 1997. China' s residential real estate sales in 1999 recorded an increase of 13.6% than over the previous year. The end of the welfare housing distribution system has led to an increase in individual's demand for commodity housing, which is the underlying cause for the rise of the mortgage market. The growing mortgage market can also be attributed to the fact that banks have competed for profitable line of business. Moreover, foreign banks have been confined to foreign currency business until 1997. Against this background, the report will to analyze the contributing factors to development of mortgage market in China, the role of foreign banks in this market, in general, and case study of a Hong Kong-based banks which has the same status of foreign banks will also be examined. The paper shows that the underlying reason for the growth of mortgage market is rooted in commercialization of housing market and banks. Rising incomes and government attempt to stimulate the domestic demand are other important factors. Foreign banks have not played a significant role in China mortgage market as they are largely restricted to foreign currency business, This report will try to investigate the operation of a Hong Kong-based bank towards China mortgage market which has branch operations in China. Desk research will be conducted so as to have a general picture of the housing reforms and the mortgage market in China. A Hong Kong-based bank which has a branch in China is chosen for a better understanding of the operation of the mortgage market. Indeed, 200 random sample records are drawn from this bank in order to test for the impact of selected factors in a bank mortgage decision in China. These factors include the status of borrower, the incomes, the amount of deposits, and the relationship with the bank. The results of the model conclude that banks granted mortgage loans to individual borrowers rather than companies. This may reflect that purchase of property for investment purpose is not popular. Income level of applicants is a significant positive determinants of the decision of the bank. Other factors such as the amount of deposits and the relationship with banks are not significant determinants in approving loan application. From interviews, it is known that the bank is not active in this market. It has not formulated any business plan to capture large market share. In the past, Hong Kong-based banks could still provide mortgage business on external sale housing to both the Hong Kong people and local residents in China. It is because the interest rate for mortgage lending in RMB is very high at that time, it's about 13% to 14% on average. Besides, the maturity of lending is relatively shorter (usually 5 years). Thus, even local banks in China are eligible to offer mortgage lending for external sale commodity housing, foreign banks in China might still find the business profitable. The slow economic growth during 1997-1998 has pushed down the interest rate for mortgage lending in RMB to around 5% to 6%. Compared with 9.5% to 10% interest pricing in Hong Kong dollar, foreign banks have found it difficult to compete with local banks in China. Mortgage lending in RMB appears to be more attractive to customers in China. Therefore, the mortgage market has been mostly dominated by China banks due to the restriction of Renminbi business for foreign banks. Besides, in the absence of an active secondary market for property trading, some foreign banks are hesistant to enter this market because of the high risks involved. To deal with this, foreign banks have usually treated mortgage loan in China as a clean loan and required additional recourse guarantee (回購保証) from related developers. Chinese government has mostly allocated both the construction loans and mortgage lending of a specific property to one bank, usually are "Big Four" - Bank of China, Agricultural Bank of China, Industrial & Commercial Bank and China Construction Bank. Therefore, it is difficult for foreign banks to capture a big share in the mortgage market under such circumstances. The prospects for the mortgage market in China are however promising as the Chinese government has promoted the private real estate market to boost the economy. The entry of WTO will also help to release the restrictions on the operations of foreign banks in China such as RMB business. Nevertheless, when a foreign bank is allowed to participate fully in the mortgage market, it will be faced with higher risks in liquidity and foreign exchange.
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