Here is another article from Reuters:
By Lee Chyen Yee and Simon Rabinovitch
BEIJING/HONG KONG Aug 6 (Reuters) - China's banking regulator has ordered lenders to conduct a stress test on their businesses assuming a fall in house prices of up to 60 percent, just as measures to cool the sizzling market start to bite.
On Friday, official media said the government extended the stress tests on loans to property-related sectors, including cement and steel.
Here are some questions and answers about the tests: <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Factbox on China's property policy [ID:TOE67504C]
China widens stress tests to steel, cement [ID:nTOE67500M] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
WHAT IS THE SIGNIFICANCE OF THE STRESS TESTS?
China's banking regulator has tried to play down the stress tests, saying that they are a normal exercise in risk management and do not reflect its forecasts for the property sector.
But two consecutive days of sharp declines in developers' share prices suggest that, at the very least, the tests have given investors pause for thought about how determined the government is to cool the real estate market.
With industrial production slowing and concerns about the global economy acute, there had been some market speculation that China might relax its property clampdown to ensure that its economic recovery stays on track.
Since April, Beijing has restricted lending to developers, enforced higher down payments on mortgages and made it harder for people to obtain mortgages on purchases of multiple homes.
These measures have caused a sharp drop in transactions, but so far housing prices have barely fallen. Nationwide, they were down 0.1 percent in June from a month earlier. [ID:nTOE64A01H]
By calling for such extreme stress tests, Beijing could be sending a signal that it is prepared to see property prices register a steeper fall before relaxing its stance.
"The controls will last a long period until property investors finally lose confidence," Wang Xiaoguang, an economist in the National School of Administration, said this week.
COULD PROPERTY PRICES REALLY FALL 60 PERCENT?
Most analysts think that property prices could fall by about 15 percent nationally and more sharply in the top-tier markets, such as Beijing and Shanghai, that have been particularly frothy.
Apart from a handful of people, such as Kenneth Rogoff, a former chief economist of the International Monetary Fund, no one is predicting a dramatic or imminent collapse.
Qing Wang, Morgan Stanley's chief economist, said that the risk of a 60 percent drop was tiny and was being used to ensure that the stress tests lived up to their name in examining the effect of a "low-probability but high-impact" event.
"Chinese banks were initially asked to test a 30 percent decline in property prices and the results were reported to be quite benign," he said. "So banks are now being asked to conduct a more meaningful stress test."
WHAT WOULD HAPPEN IF HOUSING PRICES PLUNGED?
A steep fall in property prices would have limited direct impact on the banking sector, because both households and lenders have very low levels of leverage.
The average down payment ratio is about 42-45 percent of property values, Goldman Sachs economists estimated. With so much cash down, few home buyers would be willing to walk away from their homes in a falling market, limiting the scope for defaults.
What's more, mortgages account for only about 13 percent of total lending by banks, so even a mini-wave of defaults would do little to their overall books.
A moderate fall in housing prices could actually support the broader economy.
The government would have fresh impetus to follow through on its pledged investment in public housing, and developers might dust off construction plans if transactions pick up.
"A drop in home prices of 15-20 percent is both acceptable and tolerable. This will boost property transactions and have a positive impact of the overall economy," said Cao Xute, a property analyst with Sinolink Securities in Beijing.
HOW WILL THE TIGHTENING AFFECT DEVELOPERS' FUND-RAISING?
The property tightening has prompted some developers, especially the Hong Kong-listed ones, to raise funds in overseas markets to pave the way for more land purchases later this year and to beef up their cash-flow.
"There are some risks of tight capital that developers are facing during a time of market uncertainty," said Ying Wang, an analyst at Fitch Ratings.
"Developers are facing some difficulties in raising money within China's capital markets and bank loans might not come that easy. And so, issuing overseas bonds is a pretty good alternative," she said.
Developers have had strong cash-flows this year, thanks to the sharp rises in property prices since the second half of last year, but that might not last given property transactions have plunged by 80 percent in top cities.
Analysts said a third of developers have already cut prices, and they expect another 30-50 percent to do so this year, which will reduce the amount of cash they now hold.
Chinese developer Poly (Hong Kong) Investments (0119.HK) is issuing new shares to raise HK$3.46 billion ($445 million) to help fund land purchases.
Country Garden Holdings Co (2007.HK) plans to issue 5-year dollar bonds worth $300-$400 million, while KWG (1813.HK) is mulling the idea after a warm investor reception to Shimao's (0813.HK) $500 million issue late last month. [ID:nTOE66R02I]
HOW HAVE SHARES REACTED?
So far, shares of developers have been harder hit than banking stocks after news of the stress tests, with investors more worried about real estate and its related counters, such as cement and steel, analysts said.
Over the past two sessions, the Shanghai property sub-index .SSEP has fallen 3 percent, while the banking sub-index .SSEFN has shed about 1 percent, both underperforming the broad market's .SSEC mostly flat performance.
Analysts said developers' shares would fall further if transactions slide further in coming months and developers begin to cut prices.
On Friday, the materials sub-index .SSEMT, which includes steel stocks, rose 0.5 percent, in line with the wider Shanghai index after reports earlier in the day that said the stress tests have been extended to property-linked sectors. (Additional reporting by Langi Chiang; Editing by Neil Fullick) (See
www.reutersrealestate.com for Reuters' global service for real estate professionals)
