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 per cent 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 per cent to 60 per cent 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 per cent.

The tougher assumption may underscore concern that last year’s record $1.4 trillion of new loans fuelled 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 per cent in the first quarter from a year earlier, according to estimates from Knight Frank LLP, the London-based property advisor.

A deep slump in China’s property market may further slow the nation’s economy, which grew at a less-than-forecast 10.3 per cent pace in the second quarter. China is still the fastest growing major world economy. Concern that Chinese growth may slow due to a real-estate slump erased an early rally in US stocks.

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 per cent and interest rates rise by 108 basis points, the person said. Pretax profits would fall 20 per cent under that scenario. A basis point is 0.01 percentage point.

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 per cent in June from the previous month, the statistics bureau said July 12. Prices rose 11.4 per cent from a year earlier, the second monthly slowdown after April’s record expansion.