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Chinese Banks Stress Test for Housing Armageddon

Written By Brian Hicks

Posted August 4, 2010



Just two days after Bloomberg ran a story about Zhang Xin, the Beijing billionaire who doesn’t believe in bubbles, comes this story that’s bit more sobering.

You see, while Zhang Xin is still doing her best David Lereah impression, Chinese bank regulators are beginning to sweat bullets.

In fact, they told lenders last month to conduct stress tests using a 60% price decline in housing as a one of the conditions. 

That’s true even though Zhang insists, “I don’t see any bubbles. The next few months will be a fantastic time to buy.” 

Hmmm…I wonder where I have heard this before?

In the meantime, it looks like Chinese regulators aren’t buying it either. Instead they are preparing for the prospect of an all-time bust.

From Bloomberg entitled: China Said to Test Banks for 60% Home-Price Drop

“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.

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.

“There is a perception in the real-estate development community that banks and the market cannot tolerate much more than a 25 to 30 percent drop in prices,” said Nicholas Consonery, an Asia specialist at Eurasia Group in Washington.”


East, West, North, and South, the madness of bubbles is always the same.


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