Chinese banks ready to absorb fall out if property prices plummet, tests show

CCB would only suffer a clear rise in defaults if property prices tumbled by 63%, the 21st Century Business Herald has reported, citing an unnamed source who is close to the bank.
 
The China Banking Regulatory Commission told banks this month to conduct stress tests to examine how their books would hold up should the property market crash. The worst case scenario envisioned a 60% plunge in prices, which most analysts see as an extremely remote possibility.
 
‘Because CCB has taken preventative steps, its situation is very optimistic,’ the source was quoted by the Chinese language newspaper as saying. As the same time CCB, the world’s second largest bank by market value, said that it had already reined in lending to the real estate sector.
 
CCB’s view about the property stress tests would be consistent with the conclusions of other banks that have been reported so far. Bank of Communications said last week that the ratio of bad loans in its mortgage business would rise by only 1.2% in the event of a 50% fall in real estate prices. In the same circumstances, non-performing mortgage loans would climb by up to 2% at China Merchants Bank.
 
The Chinese government launched a crackdown on property speculation earlier this year, raising mortgage down payments and curbing lending to developers, because it was fearful that soaring prices could create a property bubble.
 
Price rises have slowed in recent months and industry insiders expect outright declines soon, though not on the magnitude of a 60% collapse. Wang Shi, chairman of Vanke, the largest listed Chinese developer, was quoted as saying that housing prices in top tier cities would fall by about 10 to 15%.
 
With one arm, China is pouring cold water on property speculators. With the other, it is tossing a life buoy to the real estate sector via increased spending on affordable housing, experts are warning.
 
‘The affordable housing scheme can partly compensate for a slowdown in market based real estate investment this year. The top leadership has repeatedly demonstrated very strong political will on this issue,’ said Yu Jun, a property analyst with CITIC Securities, China’s largest listed brokerage.
 
China has tried to push public housing before, but investment was halting and controversy erupted when some of the homes ended up in the hands of relatively wealthy people. Meanwhile property is still beyond the scope of affordability for most Chinese, fuelling public anger that the government is now trying to assuage with its most ambitious programme ever for cheap housing.
 
The government plans to build 5.8 million housing units for poorer citizens this year, which analysts estimate will involve spending of up to 400 billion yuan ($59 billion). That compares with total investment in real estate of 2.39 trillion yuan in the first seven months of the year.
 
In the past, promises to build more affordable housing amounted to little. Not enough was built, and much of what was built went to families who did not need subsidised homes.