Banks told to do stress tests for property

PUBLISHED : Friday, 06 August, 2010, 12:00am
UPDATED : Friday, 06 August, 2010, 12:00am

The mainland's banking regulator has asked lenders to conduct stress tests to see how they would fare if property prices slumped 50 to 60 per cent, banking sources and media reports said.

The China Banking Regulatory Commission was not available for comment yesterday but Bloomberg quoted an unidentified official as saying that the CBRC had last month told lenders to conduct stress tests to gauge the impact of residential property prices falling as much as 60 per cent, a person with knowledge of the matter said. It said the move underscored concerns that last year's record US$1.4 trillion of loans may have fuelled a bubble in property prices, which rose 11.4 per cent in June from a year earlier.

Property stocks fell the most in three weeks in Shanghai yesterday and bank shares also dropped because of worries that the property market was already under pressure from government measures.

'It is not clear why the CBRC would ask banks to use such a harsh assumption in a stress test. Even the leaking of this would cause a shock in the system as it may be taken as a signal of the government's view on property prices,' said Credit Suisse analysts in a note to clients.

Previous stress tests had been based on an assumption of prices falling as much as 30 per cent. 'If prices do correct by 60 per cent, every bank in China will likely be in serious trouble,' Credit Suisse also said.

It said banks were exposed directly and indirectly through holding collateral for other loans, and such a fall in prices would reverberate through the economy. However, analysts do not believe Beijing would allow property prices to fall by 60 per cent, particularly at a time when it is concerned with a broader economic slowdown.

The government faces a dilemma: allowing property prices to rise underpins economic growth but asset bubbles can add to social unrest as many will be priced out of the market.

The mainland's gross domestic product grew 10.3 per cent in the second quarter, slowing from a sizzling 11.9 per cent rate in the first three months, as Beijing tightened credit.

The minimum mortgage rates and down-payment ratios for second-home purchases were raised and lending for third homes in some cities suspended. Property prices in 70 cities dropped 0.1 per cent in June from the previous month. Prices were 11.4 per cent higher from a year earlier. Sun Mingchun, an economist with Nomura, has estimated that mainland property prices were likely to fall 10 to 20 per cent in the next 12 to 18 months. Tao Dong, an economist with Credit Suisse, forecast prices would drop 20 to 30 per cent.

Results from previous stress tests show that the ratio of non-performing property loans among Chinese banks would rise by 2.2 percentage points if home prices dropped 30 per cent and interest rates rise by 108 basis points.

Price surge

Real estate values on the mainland rose by 11.4 per cent in June

The new stress test will be based on property prices falling as much as: 60%