“Ghost Collateral” ~ Pretty Spooky Stuff!
Here's another contrived financial illusion out of China that can best be described as nothing more than a massive Ponzi scheme. Essentially, multiple prospective borrowers use the same asset as collateral to qualify for a bank loan and when that asset is physically inspected it simply may not exist at all.
This gets even more complicated because if a banker did go out to inspect a pile of iron or copper that may have been put up as collateral, the bank officers often don't know who actually owns the collateral so they are either willingly participating in the Ponzi scheme or being duped themselves. Even more troubling is when real estate is used as ghost collateral, which it is estimated makes up 60% of all collateral put up as security for loans. Here's the problem: Unlike in Canada, the U.S. and most other developed nations, apparently in China there is no easy way to verify who actually owns a piece of property so the convention is to simply take a person's word that he/she/they are the owners of the property they claim is theirs – pretty dubious lack of transparency indeed. The tentacles of ghost collateral spread too far and wide to cover in this article. The whole scheme takes deceptive financing to astronomical levels with implications that are simply mind blowing.
Ghost collateral is becoming a very big issue in China recently and the ramifications can and will have a global impact. This financial hocus-pocus is a symptom of the lengths mainland Chinese are going to in order to diversify their wealth within and outside of China. Loans attained by means of ghost collateral have been used as deposits on real estate all over the world. Should this house of cards begin to crumble then those loans will be called in, consequently global assets may need to be sold to settle obligations back in China.
This layer-upon-layer of deceptive financial manoeuvring is bound to catch up with the perpetrators. How high this house of cards is stacked I don't know if anyone really knows. There have been many warnings issued recently and some by our own Bank of Canada:
“As a result of the tighter federal lending rules, borrowers trying to buy million-dollar-plus properties in Vancouver’s market are increasingly taking out dangerous loans from shadow bankers in a fast-growing and poorly regulated financial market.
There is also evidence of growing links between shadow banks and traditional banks, according to the Bank of Canada’s June 2017 report, as people borrow large amounts from shadow lenders to use as down payments in order to qualify for lower-interest loans from federally regulated banks.”
This is quoted from an article written by Sam Cooper of The Province on June 15, 2017 “Risky mortgages, shadow bankers threaten Vancouver housing market's stability”.
Well worth reading...