The Chinese government has mandated that its banks undergo stress tests to examine how the collapse of the country’s housing market would affect stability, according to Financial Times. On Friday, China unveiled a more rigorous version of stress tests that will investigate balance sheets in the case of as much as a 50% reduction in property values, after prominent Chinese analysts have forecast for a price drop of as much as 20-30% during 2011. The tests would test banks different areas of the country at higher levels of price reductions based regional or metropolitan property price performances.
The previous tests were criticized for only examining the effect of home price declines on loans to developers and mortgage borrowers, rather than the effect on loans collateralized by land or real estate and under-estimated potential risks. Wang Tao of UBS Securities warned that a decline of the size in the coming tests would mean “big trouble” for the Chinese economy, and his group recently described the country’s property market as being the single most important factor in the global economy. Any change in that market would drastically affect developers, cement and steel companies, commodity demand and consumer spending on items linked to property sales.
