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Are The Chinese Feeding It to the Fishes Again – High Finance and China’s Municipal Vehicles

One of the most important things in securing or raising capital is investor confidence. A high level of investor confidence can come in a number of ways. Strong quarterly sales, a positive outlook, a good credit rating, and legitimate accounting are some of the best ways. It also pays to have strong financial backers behind any of the offerings. But what happens when a government, corporation, or municipality takes advantage of the investors, trying to score large sums of capital, through trickery, fakery, and behind the scenes corruption?

Well, welcome to China’s capital markets. You see, behind the 10% year-over-year growth for the last three decades, not all is as it seems. That Great Wall of China may not be on a solid financial foundation unfortunately. After the global recession, China used stimulus monies by making possible loans through municipal vehicles for huge infrastructure projects, which put people to work building giant high-rises, power plants, dams, bridges, high-speed trains, and other things. Many applauded this effort, but in hindsight it wasn’t done on the up and up.

In China Economic Review there was an interesting article published on August 16, 2011 titled; China Downplays Local Debt, Renews Push for Bonds,” which also quotes a Bloomberg BusinessWeek article about talking about how the Chinese Ministry of Finance is claiming that the local government municipal vehicles are safe from loan defaults, and won’t cause a spike in bad loans. In reality this is a huge problem, it isn’t going away, much of the collateral of so many of these loans for malls, infrastructure, high-rise apartments doesn’t exist, and never did exist, all that exists is empty paper loans and a trail awash of corruption cover ups.

This particular article in China Economic Review stated that the Chinese Ministry of Finance is putting together a plan to allow these local governments to sell “bonds” to shore up the challenges they face with their bad loans. Approximately $1.7 Trillion in loans were made in 2010, and S&P now says some 30% maybe bad according to the article. “The finance ministry has drafted a preliminary plan that would allow designated provinces and cities to sell bonds to investors on a trial basis” a person with knowledge of the matter said.”

There was another article by Tom Orlick on August 15, 2011 in the Wall Street Journal titled “China’s Official Data Muddy Its Housing Picture,” and the article was accompanied by a couple of graphs which show the difference between China’s National Bureau of Statistics and the private estimates of China Real Estate Index System. The figures were off by so much that it was obvious that someone wasn’t telling the truth. The question to me is not which one, rather it is; why the Chinese government is putting out false statistics to stave off a total financial real estate market catastrophe.

Things in China are not as they seem, and the troubles have been exacerbated by a false sense of economic prosperity which has created an incredible real estate bubble, all backed by bogus loans, and corruption behind the scenes. When all of this collapses it won’t be pretty, but it may be a while still, as China tries to shore up its problems, by selling more bonds to cover its losses. It’s too bad China did not learn from what the United States went through. Indeed I hope you will please consider all this and think on it.

Construction Financing and Commercial Loans

There are many new challenges which are increasingly evident with commercial mortgages, particularly those involving commercial construction loans. Many commercial financing experts currently project that the changing environment for working capital loans and most other business financing will produce several new but avoidable problems for small business owners.

There have always been complex problems for business owners to avoid when seeking commercial loans. By most accounts, these difficulties are now expected to multiply because we appear to be entering a period which will be characterized by even more uncertainties in the economy. Prior standards for commercial mortgages are likely to change suddenly and with little advance notice by lenders if the current financial turmoil continues.

This article will evaluate why commercial construction loans have become harder to obtain and will discuss possible commercial finance funding solutions. The current economic uncertainties combined with less capital availability for commercial mortgages in general and construction financing in particular means that it is much more likely that borrowers will need to look beyond their regional market area for business financing help. In many areas of the United States, virtually all business construction funding sources are effectively inactive at this time in addressing new loan requests.

Even before business finance funding options became more limited recently, construction loans were generally considered to be riskier than other commercial financing by most lenders. For a commercial lender, the most significant risk factors for commercial construction financing usually include the following: (1) until the new building is completed, a commercial property cannot produce income to repay a loan; (2) a substantial risk factor is the possibility for contractor liens; and (3) many commercial construction projects take more time to complete than originally projected and/or exceed initial cost estimates. Of these factors, the risk of potential contractor liens appears to be a particular concern for commercial lenders because of the deteriorating health of the construction industry. In any event, current delinquencies in loan payments for commercial construction financing are running well above normal.

Construction financing for homebuilders has always been viewed separately by lenders because the eventual owners of single-family homes are individuals rather than businesses. From a commercial lending perspective, it is likely that the current difficulties seen in residential construction are indirectly impacting the availability of construction funding for commercial properties because the potential for contractor liens incurred during residential projects can quickly reduce the financial stability of contractors involved in both residential and commercial construction projects. This is a further reason why lenders are increasingly focusing on the risk of contractor liens as a rationale for providing less construction financing.

The feasibility of real estate investments has traditionally included an enduring theme of “location, location and location” which reflects the importance of a specific locale for investing. This is still an important factor when lenders evaluate the prospects for commercial real estate loans involving both existing commercial properties and new construction. A lender is likely to be most comfortable with a stable to growing revenue stream for a business which will in turn result in a stable to growing property valuation, thus preserving collateral for the commercial mortgage loan.

For the first time in several years, however, we are generally seeing widespread reductions in both residential and commercial property values throughout much of the United States, with some areas of the country exhibiting more volatility than others. A severe recession will result in decreasing income for many businesses over an extended period of time, and it is very difficult for either lenders or borrowers to project when this downward trend will reverse.

Given the difficulty of arranging financing based on location, using non-local lenders can be a practical solution for commercial financing involving both existing commercial properties and new construction. Small business owners should seek straightforward advice from a commercial loans expert who can provide effective strategies for changing and difficult business finance funding situations, especially in light of the challenging commercial borrowing climate prevailing currently.