China broadens stress tests for banks

• China stress tests would see how they handle a 50 percent property prices fall
• Sign of Beijing's growing official unease about the overheated real estate market

• China
• Financial Markets

(FT) -- China has ordered its banks to conduct stress tests to see how they would be affected if property prices fell by up to 50 per cent, in a sign of growing official unease about the overheated real estate market.

The tests are more stringent and factor in a larger drop in prices than earlier ones conducted in the past two years. This comes after predictions from prominent Chinese analysts of 20-30 per cent property price declines this year.

Analysts said previous tests looked only at the effect of housing price declines on loans to developers and mortgage borrowers, and disregarded the effect on loans collateralised by land and real estate. This resulted in an overly optimistic assessment of their exposure to a serious property market correction.

"If property prices drop 50 per cent we would be in big trouble; it would mean a hard landing for the economy," according to Wang Tao, chief China economist at UBS Securities. UBS recently described the Chinese property market as the single most important sector in the entire global economy because of the overwhelming importance of real estate construction to China's growth model and, by extension, global commodity demand.

Ms Wang said a crash in the real estate market could have a huge effect on developers, cement companies, steel producers and consumer purchases of items such as cars and appliances, which are closely correlated to property sales.

For now, prices are still rising in China despite more than a year of government policies to cool the sector and bring down prices that are well out of reach of most of the population.

Property transaction volume across the whole country increased in the first quarter of the year from the same period a year earlier but a closer look at data shows a steep decline in March in the 10 largest cities, which often lead the rest of the country.

Transaction volume collapsed 40 per cent from a year earlier in China's 10 largest cities in March following a 33 per cent increase in the first two months, according to Du Jinsong, a real estate analyst at Credit Suisse.

Mr Du forecasts a 5-10 per cent decline in real estate prices in China this year, accompanied by a 15 per cent dfal in transaction volume but he said most Chinese analysts were predicting a 20-30 per cent decline in prices this year.

Officials say about 20 per cent of all Chinese bank lending has gone directly to mortgage borrowers or property developers but a huge proportion of loans to other borrowers are backed by land as collateral.

China's banking regulator said it had asked banks to test the effect of 50 per cent price drops in cities with the fastest price increases, but in cities where prices had not risen as much banks were required to test for price drops of 40 per cent, 30 per cent or less.

Officials were quick to point out the stress tests were not a prediction by the regulator or an indication of the government's expectations.

Beijing has introduced a series of measures since last year to slow soaring prices, including raising interest rates, raising down-payment requirements, directly restricting home purchases, imposing price control targets and levying a trial real estate tax in Shanghai and Chongqing, two of China's biggest cities.