2010-08-06 15:41

* Bank regulator says tests normal part of risk management

* 7 top-tier cities must examine impact of 60% price fall

* Industry insiders do not see further policy tightening

BEIJING - Chinese regulators have called for stress tests on loans to a range of industries, including cement and steel, whose fortunes are closely tied to property markets on the brink of a correction, official media reported on Friday.

The tests, part of a broader investigation into banks' ability to withstand falls in housing prices, point to the governments' determination to hold tightening policies in place until the property sector cools off.

The tests envisage a 60 percent plunge in housing prices, but analysts warned against reading too much into the extreme scenario, saying the market was likely to weaken but not collapse in such a spectacular fashion.

"The banking system has made quite a lot of loans to industries upstream and downstream from the real estate market and their risks are intimately connected to the real estate market," the Shanghai Securities News said.

"Therefore, regulatory agencies have demanded that corresponding stress tests should also be conducted for industries such as steel, cement and building materials."

China stepped up a tightening campaign earlier this year to squeeze any bubbles out of its red-hot property market, but while transactions have fallen, prices have barely dipped.

The China Banking Regulatory Commission (CBRC) declined to comment directly on reports of the ultra-stringent bank stress tests.

But in a statement on its website late on Thursday, it said that stress tests differed from bank to bank and formed part of continual efforts at risk management.

Hypothetical scenarios examined in stress tests did not reflect regulators' forecasts for the property sector and nor did they herald any change in policy, the CBRC added.

"The tests show the government is not happy with the current prices. Prices haven't been falling deeply enough," said Cao Xute, a property analyst with Sinolink Securities in Beijing.

"If prices don't fall in the next couple of months, the government could tighten further, through monetary and tax measures," he said.

Industry insiders said that would not be necessary.

"Price growth in key cities has declined and property sales have plummeted," Zhu Zhongyi, vice-chairman of the China Real Estate Association, a top industry think-tank, was quoted as saying in the China Daily.

"So there is little possibility that the government will launch more tightening policies for the real estate sector before the end of the year," Zhu added.

TARGETED TESTS

Concerns have centred on top-tier markets where price rises have been most extreme.

Banks in seven cities, including Beijing, Shanghai and Shenzhen, have been asked to examine the impact of a fall in property values of up to 60 percent, the official China Securities Journal reported.

Banks in the seven cities must submit the stress test results to their provincial regulator before August 13, it added.

There would no "one size fits all" method and banks would decide for themselves how to conduct the tests based on the conditions of their local real estate market, the Shanghai Securities News said.

The CBRC has also instructed banks to stop extending mortgages to people buying their third homes in at least four booming cities -- Beijing, Shanghai, Shenzhen and Hangzhou.

The government launched a property tightening campaign in April, demanding higher down payments and curbing loans to buyers of multiple homes, because of concerns that prices were rising too fast and morphing into a dangerous asset bubble.

Speculation had been mounting that Beijing might relax the controls as the economy slows in the second half, but many analysts now believe that it will hold them in place until there is a clear correction in prices.

"In top-tier cities, prices will probably fall by 20-30 percent, returning to the levels where they started the year at the end of 2010," said Wang Xia, a property analyst with CCB International in Beijing.

Earlier stress tests showed that Chinese banks could sustain a drop in housing prices of up to 30 percent without a sharp rise in bad debt ratios. Those tests, conducted in May, also looked at the risks posed by loans to sectors tied to the property sector, such as cement and steel.