Risks of weeding out speculators

Risks of weeding out speculators

Speculators in the housing sector from Wenzhou, Zhejiang province, are likely to be weeded out of the market by the ongoing changes in housing regulations. But close attention needs to be paid for a possible chain effect, says an article in Guangzhou Daily. Excerpts:

As a dominating force in the real estate market for the past 10 years, speculators from Wenzhou have played a leading role in creating the housing bubble. If these speculators can be weeded out of the market, it will be a milestone in the government's efforts to restore optimism in the market and cool the overheating economy.

But it's necessary to be alert against any possible financial risks that could be triggered by the huge losses these speculators suffer when they are forced out of the market.

The speculators' capital structure shows 70 percent of their funds come from borrowings, including bank loans and private loans with usurious interest rates. In fact, more than 50 percent of their funds are borrowed by mortgaging houses. Such a weak capital chain and the strict rules the government has imposed have already forced some speculators into insolvency.

This year, many speculators from Wenzhou have defaulted on their loans, increasing the rate of non-performing loans for local banks. The rate was 2.69 percent at the end of June, more than seven times that in the same month last year.

If the market for speculative funds collapses, it could increase the security risks of banks that give housing loans, which is about 11.32 trillion yuan ($1.78 trillion) across the country.

As the pressure of economic slowdown increases, a sluggish housing market will ultimately harm the entire financial industry. So supervisory authorities and commercial banks both should take steps to minimize the risks.

(China Daily 08/21/2012 page9)