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Chinese Banking Stress Test Assumptions Imply Chinese Real Estate May Be Overvalued By As Much As 60%
Now this is what a real stress test should look like. Bloomberg quotes a banking insider that "China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets." And just in case it is unclear what the reality of the situation is, because as Europe demonstrated all too well, nobody would test for something which is not already priced in, China is effectively telegraphing to the world that it is bracing itself for a more than 50% plunge in select real estate values. "Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent." The doubling in stress is somewhat to be expected considering the tens of trillions in renminbi pumped into the banking system via whole loans and other CDO products, most of which have gone into building up empty cities, vacant apartment complexes, and unused infrastructure projects. As we noted previously when discussing the recent Fitch report on shadow funding of the real estate bubble, the nearly 50 million in vacant units, the ugly truth about the Chinese bubble is slowly starting to leak out.
From Bloomberg:
The tougher assumption may underscore concern that last year’s record $1.4 trillion of new loans fueled a property bubble that could lead to a surge in delinquent debts. Regulators have tightened real-estate lending and cracked down on speculation since mid-April, after residential real estate prices soared 68 percent in the first quarter from a year earlier, according to estimates from Knight Frank LLP, the London-based property adviser.
A deep slump in China’s property market may further slow the nation’s economy, which grew at a less-than-forecast 10.3 percent pace in the second quarter. China is still the fastest growing major world economy. Concern that Chinese growth may slow due to a real-estate slump erased an early rally in U.S. stocks.
Non-Performing Loans
The China Banking Regulatory Commission said in a July 20 statement that banks should “continue to deepen” stress tests on lending to property and related industries, citing a speech by Chairman Liu Mingkang during a meeting attended by regulatory officials and bank heads. The release didn’t give details. Officials at CBRC didn’t return calls seeking comment.
Results from previous stress tests show that the ratio of non-performing real estate loans among Chinese banks would rise by 2.2 percentage points if home prices drop 30 percent and interest rates rise by 108 basis points, the person said. Pretax profits would fall 20 percent under that scenario. A basis point is 0.01 percentage point.
Measures to cool property-price gains included raising minimum mortgage rates and down-payment ratios for second-home purchases, and a suspension of lending for third homes.
Needless to say the "recoupling" that will occur once investors finally peek behind th books of largely insolvent Chinese books, will blow up the economies of Australia and New Zealand, which are nothing than a second derivative on China, and will do miracles to the European export-led Golden Age.
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This lines up with EVERYTHING I have heard from EVERYONE dealing with China and then reporting back. The country is one big Ponzi scheme. The urban population has nowhere to go back to, once unemployment really starts to surge.
Big political troubles in store for China; it will start to destabilize pretty quickly.
That's not completely true. Most of the recent urban population is only 10-15 years off the farm, so they can always go back there.
But 60% overvalued is being generous. In Beijing (everything inside the 4th ring that is) prices have more than doubled.
On the other hand the Chinese government will maintain stability at all costs. If that means cancelling all debts they have the means and will to do that. They already passed a law about 5 years ago completely shutting down real estate investment from HK and Taiwan.
Mr. Ricardo. I'm no China expert but what's to stop them from buying up most of our wheat crop to feed their restive peasants with their hoard of dollars?
Maybe the USA is the chump with no place to sit when the music stops in the game of musical chairs.
Bubble meet reality. Same same here in India. Property bubble is proving to made of Kevlar.
Will not give. A lot of the manipulation happens through the large property owner/dealers. What a pinch real estate is. Ugh, that we have such a poor relationship to land.
I wonder how B and R are doing while I and C start the slow crumble.
ORI
http://aadivaahan.wordpress.com
I may answer the B part. GSE Caixa Economica Federal is in charge of inflating the bubble. As long as the carry trade lives, they will keep pumping.
The whole world is a Ponzi we're going tribal.
..or just going to war.
...Which is typically what happens in this situation...
Quite a state of affairs where a communist nation's financial propaganda is infinitely more credible than our own.
Sad, but true.
(OT Warning) No bubble in Fed.Gov borrowing-and-spending, though - looks like state and local public employee unions are a-gonna get their bailout after all (http://news.yahoo.com/s/ap/20100804/ap_on_bi_ge/us_jobs_bill).
Note that the AP refers to this as a "Jobs Bill", of course - because "Bailout of Public Employee Unions Bill" probably doesn't look nearly as good in print.
And yet, Turbo Timmy was telling everyone who still reads Pravda on the Hudson this very morning how it's nothing but blue skies and clear sailing ahead - so long as the gusher of other peoples' borrowed money never runs dry, I suppose.
Just for the sake of playing devils advocate, what are some countries/region that you all think will be able to avoid this global depression? If you had to choose...twist your arm if you will.
Brazil
Canada
Criteria is - which nations can feed and fuel themselves.
+1
Agreed. Canada is in great shape.
Brazil, I'm less sure about.
It should be noted however, that the USA can feed and fuel itself completely. The USA has plenty of oil, but doesn't touch it for political and environmental reasons. (Which I'm not saying is a terrible thing, but if push comes to shove, The USA can take care of itself).
Of course, getting to that oil would take time (both in terms of infrastructure, and in political wherewithal). It's not a short term possibility.
The US has enough oil just as a drunk with a fifth has enough alcohol to last him his lifetime, if he drinks it all at once that is...
The US, at current rates of consumption, would drill through its oil in no time flat. It's not so much how much you have, but how much you use.
Environmentalists are used as the scapegoat. They were used to hide the fact that oil is in fact exhaustible; they were used as a reason to not build more oil refineries, which would have been for processing heavy crude, which would have leaked that light sweet crude is running out; and, you know, if we could run out of light sweet crude then that means that Peak Oil is real (well, those how are educated know this already).
But... it's very likely that the US has in fact been on a road to keep from using its own reserves (once again, environmentalists being used as the scapegoats to distract from the reasons for this [possible] policy). Back in the 70s one of the Forbes (not sure which one) commented that the best strategy would be to use everyone else's oil up first: of course, if oil exporting countries of today would undertake this they'd be labeled socialist/communist.
Agree, could add to the criteria low level of leverage and less likely to go to war.
Canada has extra bonuses, like a tiny population and cold winters (less grasshoppers, more ants).
I'd throw Norway in too.
Fresh clean water supply is key.
No water, no agriculture, no feed or grains, no cattle or bread.
When money is becoming worthless, food prices skyrocket.
Best to have a parcel to grow your own.
You save not only the mark-up and the expenses of the grower, you save the trip (gas) to the store as well.
Prepare to hunker down for a while.
Canada is a safe easy bet, although things will likely slow here soon.
Brazil is booming, great long term, some minor personal security concerns.
Uruguay, Chile and particularly Peru look good to me.
Argentina...depending on what you need. Great climate, vast underpopulated areas, cheap land, very minor visa requirements. Massively corrupt though, and a few very minor security concerns (compared to Canada).
"Chinese Banking Stress Test Assumptions Imply Chinese Real Estate May Be Overvalued By As Much As 60%"
Actually don't the Chinese Stress Test Assumptions imply nothing more than they are actually putting their banks through bona fide stress tests, unlike the whole 'nudge, nudge, wink, wink, say no more' stress tests the US banks 'passed'?
Rag is bang on with Norway though. Those norse got it all figured out, man. As long as they steer their massive sovereign wealth fund clear of any nefarious GS double dealings they'll do fine, just like in 2008.
Regards
At the present point, the US can not fuel and feed itself. If they got their act together they could though.
It's a mixed-bag, actually.
Feed ourselves? We certainly could.
Fuel ourselves? Not by a long shot.
And therein lies the problem. Without the fuel you can't move the food. And the fuel isn't going to be there because the political will to do something about that won't be there until people are acutally, really starting to feel some hunger pangs. By then it's almost too late.
Plenty of resources, no will to do anything about it.
docj, you hit it on the head. We lack oil, but could find an alternative if we properly invested in search for one (zero will at the moment since the BPs of the world run us). I am guessing the will shall appear when we have gas at $10+ per gallon devastating any economic activity. And as you said, it shall be too late then.
Antarctica
Somalia, Iraq, Iran, Afghanistan, Cuba
Really? I heard Pyongyang is lovely this time of year.
The US has enough oil just as a drunk with a fifth has enough alcohol to last him his lifetime, if he drinks it all at once that is...
The US, at current rates of consumption, would drill through its oil in no time flat. It's not so much how much you have, but how much you use.
Environmentalists are used as the scapegoat. They were used to hide the fact that oil is in fact exhaustable; they were used as a reason to not build more oil refineries, which would have been for processing heavy crude, which would have leaked that light sweet crude is running out, and, you know; if we could run out of light sweet crude then that means that Peak Oil is real (well, those how are educated know this already).
But... it's very likely that the US has in fact been on a road to keep from using its own reserves (once again, environmentalists being used as the scapegoats to distract from the reasons for this [possible] policy). Back in the 70s one of the Forbes (not sure which one) commented that the best strategy would be to use everyone else's oil up first: of course, if oil exporting countries of today would undertake this they'd be labeled socialist/communist.
Crap! Copy and pasted the wrong stuff...
When we look back on all of this we'll see that Cuba handled the unwinding better than anyone else. Of course, they were one of the first ones, thanks to the collapse of the Soviet Union, to adapt to a massive cut in energy supplies.
I make this tip of the hat to Cuba and Fidel Castro, though no supporter of centralized governments (or any State govt) am I. The problem with depending on really good leaders is that its hard to replace them with the same...
I'll agree with many here that Canada smells less bad than most.
Oz will adjust. NZ. Maybe Germany (would have to revert to tougher mindset).
Fricken' capcha yelling again.
- Ned
Austrailia is screwed. Thank racism... Their stupid plan to over-populate in order to keep from being over-run by Aisans has resulted in far exceeding its carrying capacity. Its lands are beat, agriculture is going to blow out. And then there's their water issues...
As China unwinds Australia will tank.
Ummm, most of the new immigrants and those having large families in Australia are from Asia with Asian backgrounds! Water issues in southern Australia are being solved with desal plants that will be running next year.
And yes when China crashes Australia will tank, but to its average of 0.50-0.60 USD and 100K immigrants per year.
AUD/USD is going to be a great short.... if China decelerates just a little bit Australia is going to suffer
The thing I respect about China is that the REAL STRESS is generated by the fact that if the CEOs fudge the Stress Test - you reading this Timmy? - they will with all probability be EXECUTED.
The problem for China is that the government is trying to clamp down on corruption.
Corruption is the business model for centuries.
The problem for the U.S. is that the government is trying to reward corruption.
They only punish corruption that harms the state.
Gotta say, I can't find a reason to disagree with that.
family pays for the bullet--that's real pay-go. - Ned
Hmm. Where to hide? So what happens to gold when the Chinese realize they have 50% less wealth and need to raise capital? Sell their gold to live or run to gold in an attempt to preserve assets?
Updated DOW daily chart:
http://stockmarket618.wordpress.com
It doesn't matter if they assume a 100% drop in prices. The outcome will be a lie.
Chinese must make a minimum of 30% down payment for a home, 40% for a second home. In the U.S., FHA is still giving out no money down loans.
Chinese has to go to at least 40% or 50% before it's even a credible stress test.
to serve as another data point in the list of all that doesn't matter
because nothing matters to the markets
WHEN THEY ARE FAKE
eat shit and die all bankers behind this fraud
Let's just go straight to the die part, I see no reason to feed 'em first.
LOL!
It would be a waste of perfectly good shit.
From everything I've learned about China, I think they will handle their bubble better than we have in the United States. They seem to know how to manage things better.
Will they also stress test the shark loans system (previously pointed here a couple of days ago)? I think that would be quantified by dead bodies.
"A deep slump in China’s property market may further slow the nation’s economy, which grew at a less-than-forecast 10.3 percent pace in the second quarter."
10.3% is slow? Are these people sniffing toner?
Yeah, people have no idea what this means. It means that they have to double their output in only 7 years! And then in another 7 years they'd have quadrupled it!
Unlike here in the US, the Chinese actually communicate the growth necessary to keep things from tanking. Yes, they have to push over 10% to keep from collapsing! Anything less isn't sufficient for pulling people into the middle class fast enough to stave off a revolt.
Utterly brilliant strategy by the US to kill communist China! But, as the Russians have pointed out, the US didn't win, it just took (will take) them longer to lose.
Do they have chinese CDO and CMO's?
I bet they would be even more defective than the crap you buy at walmart
BAD HEADLINE!
If the RE market could drop 60%,
then it is overvalued by 150% ...
60%/40% = 150%
There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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As China expects to lead the world in economic growth in 2010, some think the nation's real estate markets pose an opportunity and will likely see appreciation in the coming year.
When comparing price-to-book ratios vs. return on equity, a recent study indicated that Chinese real estate was the most undervalued when vs. other high-growth nations like India and Hong Kong. Additionally, some expert analysts state that the Chinese real estate sector has underperformed by nearly 30% when compared to the benchmark MSCI China Index.
http://www.financemetrics.com/chinese-investment-in-property-causes-a-fl...