Subject: China Said to Tell Banks to Stress Test for 60% Home-Price Drop - Bloomberg (WOW!!!)
From: "Michael Andrews" <[email-masked]>
To: "Thad Brown" <[email-masked]>, "Ronnie Mainieri" <[email-masked]>, "Curt Hastings" <[email-masked]>, "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>
Date: Wed, 4 Aug 2010 11:00:57 -0400

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 [email-masked]

Last Updated: August 4, 2010 10:16 EDT