Transcription
After the COVID-19 pandemic, Hong Kong's economic recovery expectations have significantly increased, causing the property market to continuously bottom out. Property prices have accumulated a significant drop of up to 30%, with commercial property experiencing even greater declines, impacting all sectors. Even the previously booming money lending industry has been affected. According to another Hong Kong statistic, in the past 4 years, a total of 44 financial companies have closed or exited the market, a reduction of nearly 18%. The sustained low property market has become the main reason triggering the exodus from Hong Kong's money lending industry. Some industry insiders even point out that the entire industry is on the verge of collapse.
This situation arises because of four major "deadly voids" in the market. Let me explain the history of this industry. The money lending industry provides funds to meet the needs of enterprises or individuals. It is also mentioned that in Shakespeare's "The Merchant of Venice," the main character is a moneylender. In Hong Kong, they are commonly known as "big lenders," meaning high-interest lenders.
Since the handover in 1997, the industry has been regulated by the government, moving from underground to above ground, becoming the current form of financial companies that provide loans. In the past, financial companies had a negative impression, with interest rates higher than banks. However, the business was booming. One reason for this was Hong Kong's stock and property markets, which attracted many investors to join. The scope of business ranges from private lending to property-related cases. Company registration data shows that in 2021, the number of financial companies in Hong Kong reached 2,490.
During the industry's growth period, some licenses, exemptions, and accounts were sold at high prices. This happened because if a licensee or any party involved encountered issues or had to withdraw for any reason, they were willing to sell their licenses for hundreds of thousands or even millions of dollars. However, in recent years, the industry has been on a downward trend. The price of financial company licenses has plummeted. Chen Ze Ren, from the Association of Financial Services, pointed out that license prices have dropped by over 1 million Hong Kong dollars, a decrease of more than 90% compared to their peak.
In addition to the sharp decline in prices, data also reflects that the industry is in a contraction period, with the number of licensed lenders continuously decreasing. At the end of 2024, the total number of lenders was 2,110, a decrease of 380 in one year. By the end of June this year, it further decreased to 2,046, meaning a reduction of 444 in 4 years, reaching a 7-year low.
The closures and exits are due to operators facing severe blows. The first major blow is the tightening of loan covenants, making it difficult to obtain new loan applications. A review of several listed companies engaged in lending business in Hong Kong reveals that private lending business income is relatively stable, but mortgage lending income has stagnated or even declined by 20%. For example, Hong Kong Credit and China United Holdings, both involved in mortgages, have experienced double-digit declines in their mortgage business income. Compared to 2019, the decline has been nearly 30% to 40%, reflecting the business situation.
The second major blow is the difficulty in lending new funds to clients, while existing loans face risks. This is because property values have fallen, and the value of assets held by financial companies has decreased. Both Global Credit and China United Holdings have incurred impairment losses and increased provisions. Previously, China United Holdings' subsidiary, China United Finance, and three other financial companies applied for liquidation, involving an amount of 80 million yuan. Tommy, a person in charge of a financial company with outstanding loans, pointed out that while the decline in Hong Kong registered residential property prices from their peak has had a relatively minor impact, the drop in commercial properties like shop units has been more severe, with some areas experiencing price drops of up to 80% to 90%. This has led to many loans that were previously secured by property falling into the risk of being unrecoverable. He also pointed out that the loans provided by companies to clients are typically up to 60% of the property value, but with the current property price drops exceeding 60%, the situation of unrecoverable debt is emerging. Both residential and commercial properties are facing issues. Tommy also revealed that moneylenders using commercial properties as collateral are also facing difficulties.
The third major blow, in addition to unrecoverable debts, is the tightening of bank requirements for property mortgages, exacerbating the problem. Banks are unwilling to provide loans to investors or mortgagors of commercial properties, pushing the problem further. He also pointed out that if banks are willing to provide loans, the interest rate is calculated as the preferential interest rate plus two, meaning it exceeds [unclear]. As a result, after financial companies repossess properties, it is difficult to sell them in the market. He further pointed out that when properties are repossessed, either the price has already fallen significantly, or banks are unwilling to provide loans to buyers, or the interest rates are too high, making it impossible for buyers to complete transactions. Consequently, liquidity in the commercial property market has become frozen. An industry insider pointed out that the current conditions for mortgage lending for commercial properties are conservative. Previously, banks would allow individuals to choose H-type mortgage plans or P-type mortgage plans, but now most banks only offer P-type mortgage plans. The actual interest rate for H-type and P-type mortgage plans is about 4.5%, regardless of the actual rate. However, the insider believes that the banks' stance is not the cause of the industry's liquidity crisis, but rather the commercial properties themselves. Therefore, banks adopt a more conservative attitude when reviewing applications.
The fourth major blow is the government's plan to implement regular reporting of borrower credit information by moneylenders to the Credit Bureau. The government aims to strengthen regulation. A public consultation was launched in June this year. The consultation document states that the plan requires all licensed moneylenders to regularly report borrower credit information to the Credit Bureau to improve industry regulation. While this should be a good thing, there are concerns that it will lead to increased operating costs. Chen Kang pointed out that the industry generally supports the proposal, but the high threshold for entry and staffing requirements will cause many small and medium-sized financial companies to withdraw. The estimated entry fee is about 600,000 yuan, including 180,000 yuan in registration fees and 400,000 yuan in performance bonds. In addition, there are annual fees. However, most financial companies currently use credit information services with annual fees. On the other hand, arranging dedicated staff to be responsible for credit bureau data input will further increase operating costs. He further pointed out that the government regulations require all licensed moneylenders to regularly provide credit information to the Credit Bureau. They can only provide information but do not have the right to use the Credit Bureau's data, which raises concerns that individual credit records may not be reflected in a timely manner, leading to discrepancies in comprehensive credit assessments and affecting loan approvals by banks or financial companies. He suggests that the government provide effective ways for financial companies to join the Credit Bureau, such as allowing financial companies of different scales to join at reasonable fees, to more effectively obtain comprehensive credit records.
Chen pointed out that this is the worst period for the industry in 30 years, and it is on the verge of collapse. In the past three years, Hong Kong's unemployment rate and bankruptcies have continued to rise, causing many financial companies to feel pessimistic about the future. How to ensure the healthy development of the moneylending industry and prevent people in need from being pushed into the illegal lending market has become a problem for the government and the industry to solve.