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China Said to Tell Banks to Stress Test for 60% Home-Price Drop

By Bloomberg News

Aug. 4 (Bloomberg) -- China’s banking regulator told lenders last
month to conduct a new round of stress tests to gauge the impact of
residential property prices falling as much as 60 percent in the
hardest-hit markets, a person with knowledge of the matter said.

Banks were instructed to include worst-case scenarios of prices
dropping 50 percent to 60 percent in cities where they have risen
excessively, the person said, declining to be identified because the
regulator’s requirement hasn’t been publicly announced. Previous
stress tests carried out in the past year assumed home-price declines
of as much as 30 percent.

The tougher assumption may underscore concern that last year’s record
$1.4 trillion of new loans fueled a property bubble that could lead to
a surge in delinquent debts. Regulators have tightened real-estate
lending and cracked down on speculation since mid-April, after
residential real estate prices soared 68 percent in the first quarter
from a year earlier, according to estimates from Knight Frank LLP, the
London-based property adviser.

The China Banking Regulatory Commission said in a July 20 statement
that banks should “continue to deepen” stress tests on lending to
property and related industries, citing a speech by Chairman Liu
Mingkang during a meeting attended by regulatory officials and bank
heads. The release didn’t give details. Officials at CBRC didn’t
return calls seeking comment.

Results from previous stress tests show that the ratio of non-
performing real estate loans among Chinese banks would rise by 2.2
percentage points if home prices drop 30 percent and interest rates
rise by 108 basis points, the person said. Pretax profits would fall
20 percent under that scenario. A basis point is 0.01 percentage point.

Property Slowdown

Measures to cool property-price gains included raising minimum
mortgage rates and down-payment ratios for second-home purchases, and
a suspension of lending for third homes.

Property prices in 70 Chinese cities dropped 0.1 percent in June from
the previous month, the statistics bureau said July 12. Prices rose
11.4 percent from a year earlier, the second monthly slowdown after
April’s record expansion.

Bank of China Ltd.’s bad-loan ratio would climb 1.2 percentage points
under the worst-case scenario drawn up in the latest stress tests, Li
Lihui, president of the nation’s third- biggest lender by market
value, said May 27.

Record lending last year in China and the ensuing surge in home prices
have stoked concerns that a bubble is forming that may threaten the
banking industry. Property stocks are the worst performers on the
Shanghai Composite Index this year with an average 21 percent drop,
data compiled by Bloomberg show.

Rogoff’s Warning

China’s property market is beginning a “collapse” that will hit the
nation’s banking system, Kenneth Rogoff, a Harvard University
professor and former chief economist of the International Monetary
Fund, said July 6.

Average prices may fall as much as 20 percent over the next 12 to 18
months, with declines of up to 40 percent in “big bubble” cities,
Nomura Holdings Inc. said in a July 2 report. The impact on banks’
asset quality will still be “limited” as long as borrowers have
adequate income to keep paying their mortgages, Nomura said.

The banking regulator has reminded lenders that some developers with
high debt burdens and large land reserves already face the risk of a
funding collapse, the person said. Banks were told to gauge
developers’ real borrowing needs by monitoring the progress of
projects under construction and to “strictly” control the pace of
lending, the person said.

“Special mention” real-estate development loans have climbed in
Shanghai since April and rose by 1.4 billion yuan ($207 million) in
June, Xinhua News Agencyreported Aug. 1, without saying where it got
the information.

--Philip Lagerkranser. Editors: Chitra Somayaji, Otis Bilodeau.

To contact the Bloomberg News staff for this story: Philip
Lagerkranser atlagerkranser@bloomberg.net

Last Updated: August 4, 2010 10:16 EDT