Money

China said to test banks for 60% home-price drop

(Agencies)
Updated: 2010-08-05 09:22

Bad Loans

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 concern 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.

Still, the government probably doesn't expect prices to drop by 60 percent, Consonery said in a phone interview. It's seeking to "signal to the market that banks are sound even with a significant drop in prices," he said.

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.

Related readings:  China won't relax property measures  More land offered to curb housing prices in H1  Property bubbles still a risk for China, says S&P official  House prices under 'large' pressure to fall: rpt

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.

Regulators testing banks for a 60 percent correction in "only the most bubbly markets" will probably find lenders "will not pose a systemic risk to the banking system," said Daniel Rosen, principal of the Rhodium Group, a New York-based advisory company.

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 Agency reported Aug 1, without saying where it got the information.