The Chinese seeds of the next banking scandal

Kristina Liu, 17, and her father, high school English teacher Liu Jiabing, 43, near their home in Nanjing. Mr. Liu is having difficulty securing a loan to pay off an apartment in Melbourne, which he has purchased for his daughter who will begin an Bachelor of Education at Monash University next year.

The ingredients for the next banking “scandal” are now sitting on the table ready to be mixed. It will be a scandal like none other in Australian history because it will involve Chinese rather than Australian residents as the victims.

And therefore it may involve the Treasurer Scott Morrison, firstly because the “scandal” could create a severe Australian downturn, greatly damage Australia’s education industry/international reputation and complicate Morrison’s involvement in the proposed Chinese purchase of the NSW electricity distributor Ausgrid.

Readers will be well aware that this year I have been documenting the Australian bank antics which played a big role in the apartment building boom which has caused some 230,000 apartment to now be under construction and due for settlement in the next two years or so. The vast majority have been bought on 10 or 20 per cent deposit by Chinese and other Asian investors.

The Reserve Bank has forecast a glut of apartments but has not explained to Australians the involvement of the Australian banks and APRA in creating this crisis (Reserve Bank warns on apartment glut, August 6)

I want to first emphasis that where there are legal agreements for Australian banks to fund the settlement of apartments sold to Chinese, or anyone else, they will be honoured.

But in the vast majority of cases there was no legal agreement. The Chinese investors were usually given non-legally-binding comfort by the banks that they would fund about 70 per cent of the purchase price. There were usually tags on the non-binding offer like ‘subject to market values’ etc.

On many occasions, bank executives may not have made direct contract with Chinese buyers but instead the assurance was given by an agent with the middle ranking bank executives turning a blind eye. But there is little doubt they knew what was happening.

If the Reserve Bank is right and there is to be an apartment glut causing severe damage to the building industry, our education industry and our international reputation, it may require a royal commission or a Senate inquiry to find out what really happened in the banking industry.

Banks and APRA need to keep their records.

I first alerted Australia to the looming danger when I learned in March of the extent of the credit squeeze being imposed on the Australian banks by the Australian Prudential Regulation Authority (APRA gives the RBA some wriggle room, March 22).

At that stage, the credit squeeze was giving the Reserve Bank the opportunity to lower rates without giving another boost to the housing boom.

But given that an important part of the squeeze was a severe clamp on lending to Chinese buyers of apartments, I wrote further commentary to explain the dangers and the possible looming disaster for the building industry if developers went broke (Credit squeeze threatens more than just apartments, April 6).

Then, two days later, Australia’s largest apartment owner and developer Harry Triguboff joined the controversy and explained how important banks had been in providing assurance to Chinese buyers of apartments. He warned that if the banks walked away from their non-binding assurances at a time when it was hard to extract money from China, there was great danger of a national catastrophe particularly as the banks along with second mortgage lenders are major funders of the builders.

APRA ignored the Triguboff warnings and their credit squeeze, if anything, was intensified.

Triguboff’s Meriton dominates the Sydney apartment market having about a 75 per cent market share in the inner city area. He is seeing many Chinese being forced to rescind their contracts but, at this stage, is finding other Asian and Australian investors to replace them (Chinese buyers are starting to rescind on apartment contracts, August 4).

Triguboff has the financial backing to make sure all his developments will be completed and all the builders and subcontractors will be paid. If necessary, he will buy unsold apartments himself. That means that if there is a glut in Sydney it will be manageable.

But Melbourne does not have a Triguboff and he is a relatively small player in Brisbane. As Melbourne has the largest education market, that’s where a vast number of the apartments being built “off-the-plan” are concentrated.

Melbourne is where the glut will be worst unless there is an acceleration of the emergence of new Asian buyers and Australian investors to take the apartments. Longer term, the rate of migration will be important.

While I have authored most of the warning commentaries, I have never given a human face to this misleading of Chinese investors.

In The Australian today Maggie Lu Yueyang has done just that and so taken the issue to a new level (Chinese home buyers caught in a trap, August 8)

Let me quote the first few sentences of her commentary and invite you to read the rest:

“As a renowned teacher of English in China, Liu Jiabing planned well for his daughter’s education. He chose a good university in Aus¬tralia, helped her to get an offer to enrol next year, and bought an apartment in Melbourne that is due to settle next month.

But now the apartment near Monash University that he bought off the plan for $600,000 is keeping him up at night.

“At the very first, I was told I only had to pay 20 per cent down payment,’’ Mr Liu, who works at a prestige foreign language school in Nanjing, in China’s east, told The Australian in a phone interview.

(I would add that Liu Jiabing at that early stage of his decision making was being given direct or indirect comfort by a bank. Then as the horror of the change in bank policy unfolds read what happens)

“Then they told me I had to pay 30 per cent, and later 40 per cent, as the banks won’t lend and we have to borrow from small ¬financial organisations.

“Last night I was told I have to pay 55 per cent for down-¬payment. But how am I supposed to find so much in cash in such a short time? I still have to pay my daughter’s university fees.”

Liu Jiabing thinks he can sell his deposit but he will find that is almost impossible. Like tens of thousands of Chinese he is the victim of a dirty banking/agent game.