The tests are more stringent and factor in a larger drop in prices than earlier ones conducted in the past two years. This comes after predictions from prominent Chinese analysts of 20-30 per cent property price declines this year.
Analysts said previous tests looked only at the effect of housing price declines on loans to developers and mortgage borrowers, and disregarded the effect on loans collateralised by land and real estate. This resulted in an overly optimistic assessment of their exposure to a serious property market correction.
"If property prices drop 50 per cent we would be in big trouble; it would mean a hard landing for the economy," according to Wang Tao, chief China economist at UBS Securities. UBS recently described the Chinese property market as the single most important sector in the entire global economy because of the overwhelming importance of real estate construction to China's growth model and, by extension, global commodity demand.
Ms Wang said a crash in the real estate market could have a huge effect on developers, cement companies, steel producers and consumer purchases of items such as cars and appliances, which are closely correlated to property sales. (read more)