Non-bank financial institutions played a big role in China’s overheated property boom. Because prices rose for decades despite repeated efforts to cool them, investors tried to borrow as much as they could. Their willingness to pay double-digit interest rates for additional leverage attracted investors who thought China’s property sector was too big to fail.
Officials were aware of the moral hazard long before property prices began falling. They tried to ensure that high-yield products could only be sold to institutions or “qualified investors” with adequate financial buffers, and began locking heavily indebted developers out of conventional credit markets. They suppressed the usage of alternative instruments like peer-to-peer loans and bankers’ acceptance notes.
That has had some effect. Outstanding off-balance sheet WMPs had declined to 25% of nominal GDP last year from 36% in 2017,