Sunday 9 November 2008

Property price drop raises spectre of loan defaults

A 30 per cent fall in mainland property prices could trigger serious loan defaults, ravaging banks and even devastating the entire economy, a Shanghai banking regulator has said, although this dire outlook remains a minority view.

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Guanyu said...

Property price drop raises spectre of loan defaults

Jane Cai
8 November 2008

A 30 per cent fall in mainland property prices could trigger serious loan defaults, ravaging banks and even devastating the entire economy, a Shanghai banking regulator has said, although this dire outlook remains a minority view.

Mainland property transactions have cooled and price increases have slowed sharply since late last year amid a decelerating economy.

This downturn is prompting concern over rising bad loans because bank funding accounts for about 19 per cent of total real estate investments.

The average bank non-performing loan ratio could soar to 4.73 per cent, from just over 1 per cent currently, if property prices fall by a third, according to a test of local banks conducted by the Shanghai bureau of the China Banking Regulatory Commission, bureau head Yan Qingmin said.

“We’ve been conducting the stress test through the first half of this year, trying to measure the impact of property price drops on banks’ bad loans,” the 21st Century Business Herald quoted Mr Yan as saying at a Shanghai forum earlier this week.

“If the decline is no bigger than 30 per cent, banks can still afford it. Otherwise, the whole banking sector and the whole Chinese economy won’t be able to bear the impact.”

Beijing-based investment bank China International Capital Corp estimates property prices may drop 20 per cent next year, while Credit Suisse expects a 10 to 30 per cent fall.

“The property sector seems to be the biggest uncertainty in the Chinese economy in the near future - more than the global recession and financial turmoil,” said Credit Suisse economist Tao Dong.

The government recently provided tax benefits and mortgage rate cuts to encourage buyers in the property market. The measures included reducing the deed tax for first-time buyers of property of less than 90 square metres; cancelling the stamp duty for buyers and sellers; scrapping the land value-added tax; reducing the lower limit on mortgage rates; lowering the down payment ratio; and encouraging local governments to launch other support measures.

“We doubt their effectiveness,” said Mr Tao. “The package has missed two crucial points: liquidity conditions among developers and price expectations among homebuyers. We still expect a price war, which may lead to another 10 to 30 per cent fall in prices in the residential property market over the next 12 months.”

Many economists have forecast similar declines in property prices. But despite the grim scenario, few see as disastrous an impact on the banking sector as Mr Yan of the CBRC.

“The banks will see rising NPLs as the export markets and the property sector deteriorate, but that is a cyclical problem, as opposed to the more dramatic situation facing western banks,” said Mr Tao. “Chinese banks have healthy balance sheets. So we should not panic.”

JP Morgan China equities chairman Jing Ulrich said non-performing loan levels might pick up in the next two years, but from a low base.

“Exposure to problems associated with high-end property and the export sector may erode bank profits,” she said. “But on the whole, the financial system does not appear to face major balance sheet risk, with the possible exception of some small and under-capitalised regional banks.”

Shanghai Pudong Development Bank and Shenzhen Development Bank are mulling bond issues and share placements to replenish capital. The worry is that their capital adequacy ratios may miss the minimum 8 per cent requirement set by the regulators, the Securities Daily reported yesterday.