Money

Stress tests to test lenders

By Wang Bo (China Daily)
Updated: 2010-08-06 10:29

Move to help policymakers decide on further measures

BEIJING - The China Banking Regulatory Commission's (CBRC) plan to conduct stress tests on lenders to gauge the impact of a fall in property prices has triggered fresh concerns that the realty price dip may cast a shadow on China's economic growth.

Workers at a construction site in Huaibei, Anhui province. [Photo/China Daily]

Banks were ordered to conduct stress tests last month under the worst scenario that housing prices in the key cities which saw sharp price gains recently, could drop by between 50 and 60 percent, Bloomberg reported on Thursday, citing unnamed sources close to the regulator. It did not specify the result of the test.

The latest stress test is the toughest one instructed by the banking regulator and also underlines policymakers' concern that the record credit expansion of last year could lead to a new crop of bad loans in the banking industry.

The CBRC said in a statement posted on its website on Thursday that it asked commercial lenders to test quality of their property loans under various stress situation since May, but did not specify whether a tough stress test under the condition of 60 percent property price decline has been included.

The banking regulator also said commercial lenders could make their own decision on whether to suspend lending to third home buyers in some cities seeing excessive house price rise, but should at least significantly increase downpayment ratio and interest rate for such loans.

The benchmark Shanghai Composite Index fell by 0.67 percent on Thursday to close at 2620.76 points, with property and bank shares leading the declines by 2.17 percent and 1.67 percent respectively.

The previous stress tests on property loans initiated earlier this year had revealed that Chinese commercial lenders could withstand home price falls of 30 percent, with their bad loan ratio up 2.2 percentage points and pretax earnings down 20 percent.

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Analysts said the tougher tests do not necessarily mean that a 60 percent slump in China's property prices will happen in the short term. But it would provide a baseline scenario for the top policymakers.

China took decisive measures to cool the red-hot housing market from April this year, even as economic growth slowed to 10.5 percent in the second quarter from 11.9 percent three months earlier.

"The static evaluation under a 30 percent fall in housing price has underestimated the full impact on banks' assets quality, as property market correction and overall economic conditions are highly interactive," said Fu Lichun, a banking analyst at Southwest Securities.

Fu said the current move might also reflect the government's determination to continue its tightening measures on the property sector. The test will help policymakers determine to what extent a realty market correction can threaten the banking industry, whose property loans exposure is nearly 10 percent of the total lending.