Aug. 5, 2010 (Chinavestor) China is planning a stress test of the country's banks to discover the potential risks that a dramatic slump in property prices poses to the nation's financial system. China's banking regulator has told banks to go over a possible a "worst case scenario" that would involve property values plunging by 50% to 60% in cities that have seen the most dramatic run up in prices.
The China Banking Regulatory Commission may be fearful that a sudden drop in real estate prices could crimp the cash positions of Chinese developers and force borrowers to default on their loans. Stress tests are nothing new for Chinese banks, but the most recent round performed in the past year used a scenario where prices fell 30%.
Analysts say the newest test is more of precautionary measure that emphasizes the government's concerns over rapidly soaring real estate values. After residential prices soared by 68% in the first quarter, China forced banks to bolster their capital reserves and employ stricter lending requirements to crack down on speculative investors.
Previous stress tests show the ratio of non-performing real estate loans among Chinese banks would rise by 2.2 percentage points if home prices drop 30% and interest rates rise by 108 basis points, according to Bloomberg News.