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check, 180bln RMB

Doubts cast on stress tests' all-clear for Chinese banks
By Simon Rabinovitch in Beijing


After administering significant banking stress tests earlier this year, Chinese regulators concluded that if the highly improbable occurred and property prices crashed by 50 per cent, non-performing loans would rise by just a small amount.

It was a clean bill of health, as clear a statement as possible from the government that market concerns of risks from the countrys property bubble had been blown out of proportion.

Such confidence is unwarranted and could be dangerous, according to analysts who reviewed a copy of the stress tests obtained by the Financial Times.

The analysts, who asked to remain anonymous because of the sensitivity of the subject, said the design of the tests was more rigorous than they had expected.

However, they warned that large omissions and questionable assumptions undermined the results: a steep fall in housing prices would probably be traumatic for Chinese banks.

The sequence of threats to the property sector envisioned in the stress tests was wide of the mark, they said. In the heavy stress scenario, prices would decline by 50 per cent and transactions would fall by 30 per cent.

In the real world, the opposite has happened. Property prices have barely started to decline but sales have plummeted in the past two months, down 35 per cent year on year in September and 39 per cent in October in large cities, according to analysis of government data by Industrial Securities, a domestic brokerage.

The explanation is simple enough: as potential buyers come round to the belief that prices will dip further, they are content to sit on the sidelines.

But the ramifications are much more complex. Property developers have been hit by a cash crunch and are talking about cutting prices aggressively.

It is constraining cash flow very seriously at developers, but, given the absurdly benign results of the stress test, I suspect that we didnt have any banks look at that issue in depth, said one analyst.

The plunge in buyers is also beginning to weigh on construction, which could deal a blow to the wider economy.

Those knock-on effects were barely tested in the stress analysis. Banks were told to catalogue a series of property-related loans: to developers, for mortgages and to upstream industries such as cement and downstream industries such as furnishings.

But the methodology imagines that while house prices drop overall economic growth remains more or less unimpaired.

Before property prices drop 30 per cent, one needs to think how much sales are down and, more importantly, how much construction is down. Not only will that impact on steel and cement, but it also would mean a drop in industrial production, investment and jobs, a second analyst said.

A third analyst said that the tests did not do a good job of grappling with the way a property slump would ripple through the banking system: he saw no inclusion of the impact of falling land sales and prices on the value of bank collateral.

Yet the vast majority of collateral in the Chinese banking system is land or property, so a slump could force writedowns across the board. This is the key correlation risk. If developers cant sell property and local governments cant sell land, its hard to see why banks would be any better at either task under such conditions, the third analyst said.

A fourth analyst outlined concerns about the actual execution of the tests, noting that big banks had strict instructions to follow but smaller institutions potentially the ones at highest risk were left to judge for themselves how to examine their portfolios.

Stress tests are a relatively new exercise in the Chinese banking system and Aprils were the most exacting ever in the country. Last week, in an assessment of Chinas financial stability, the International Monetary Fund said that Beijing should make them both more regular and more rigorous.

Chinese regulatory officials admit privately the stress tests need to be improved and that the true scale of banks exposure to a property slump remains unclear.

One senior government official, who asked not to be named, said that banks were often unaware that large loans given to giant blue-chip state-owned enterprises had actually been funnelled to those companies real estate subsidiaries.

He also acknowledged that falls in the value of land used as collateral had not been fully taken into account in the stress tests.

i dont know, i dont think they are clever enough to spread rumour.

Li daokui: "china 2011 trade surplus will weight 1.5% in GDP. in next 2 yrs surplus may drop to zero or below, RMB should devaluation."

Li daokui also said chinese average income will increas 10% per yr.

he is not a lier.