China’s Old-Fashioned Banking Fraud

David Pierson of the LA Times reports on the bubble-rific city of Hangzhou, which has lately become the leading edge of China’s looming property bust:

The median price for a 1,000-square-foot home here in July was $290,366, a steep 18.2% drop from the previous month because so many high-end homes have been taken off the market. By comparison, a national index of median prices rose 1.6% over the same period.

….Experts said up to half of Hangzhou’s housing market has been driven by investors rather than homeowners — double the estimated national rate. In this no-holds-barred environment, raising capital was easy if you knew how. In a scheme called “returning the flat,” small groups of speculators would sell the same property to each other to drive up the listed value of a home. With each transaction, the next speculator could obtain a larger mortgage, using the excess cash from the lender to invest in other properties. The conspirators would then divide the profits once they unloaded the property outside their circle.

“A flat could be worth 10 times more by the time they were done,” said Chen Zhencheng, director of the National Real Estate Management Alliance, who said that the practice broke no laws. “This was happening in 30% to 50% of some building projects. The places were full of speculators.”

Roughly speaking, I think this is just the old-fashioned version of what Wall Street did with structured finance during the aughts. It’s also a lot easier to understand. If Americans ever figure out that this is what happened, they might actually start to get seriously mad at the banking industry instead of just faux mad as they are now.

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