China: Real Estate Loans – a potential threat

The rapidly growing real estate market poses risks to the banking system in China. This is the conclusion according to information of the Chinese press regarding the “endurance tests” that applied to the largest banks in the country. The Chinese authorities ordered banks to measure their endurance, based on extreme negative scenarios for the national economy and asset markets.

The most significant of these “stress tests” was a sharp fall in house prices by 50%. According to information on the Chinese newspaper “21st Century Business Herald” – which reproduced by Reuters – showed that such a crisis in the real estate market would had as a result the rapid growth of high risk mortgage loans.
According to figures that have been filed to the Chinese authorities, large banks in the country have a very low; high risk loans rate of 1%. But if real estate prices fall by 50%, this percentage will increase up to two percentage points on each bank.

Particularly vulnerable seems to be the loans granted for house purchases, which were built in 2009, when property prices were significantly increased in several Chinese cities. According to the Chinese central bank, loans to real estate construction companies and ordinary home buyers, reaching the amount of 8.71 trillion yuan (1.28 trillion dollars), accounting for 18% of the total loan portfolio of banks. Currently, Chinese borrowers meet their obligations. However, if the situation change and the rate of high risk loans increase, mortgages might be the factor of a big “loop” for the Chinese banks.

At the moment, the risk on real estate market remains remote and the large Chinese banks have high profitability. The China Construction Bank Corp., the second largest financial institution in the world by market value, posted a net profit increased by 20% in the second quarter reaching to 35.6 billion yuan (5.2 billion dollars) from 29.55 billion yuan in the same quarter of 2009, over the forecasts of the real estate market analysts.