For all the China bulls, it looks like it is over. Bloomberg reported today that the Chinese Government is preparing for banks to prepare stress tests which include scenarios where real estate prices drop 60%. The Chinese Government has finally awoken to the real estate bubble which many economists have been warning about for months.
If real estate prices drop 60%, even people who put down 50% will be underwater. In addition, this will lead to a severe slowdown, and possible recession/depression. The good news is that the Government is finally admitting a problem exists and trying to rectify it. However, as recent experience in the US economy demonstrates it is much to create a mess then to clean it up. A crash of the Chinese economy would send shockwaves through out the globe. From a US point of view who will buy our debt if China cuts down on it's purchases of US treasuries? This will likely push up yields, which will further exacerbate the long term budget deficit problem. According to the article "residential real estate prices soared 68 percent in the first quarter from a year earlier". I am hoping that I am wrong, but China is looking like the US 2006.
Here is an excerpt from the article followed by a full link:
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, a person with knowledge of the matter said.
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 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.
Full link here: _http://www.bloomberg.com/news/2010-08-04/chinese-regulator-said-to-tell-banks-to-test-for-60-drop-in-home-prices.html
Disclosure: None
If real estate prices drop 60%, even people who put down 50% will be underwater. In addition, this will lead to a severe slowdown, and possible recession/depression. The good news is that the Government is finally admitting a problem exists and trying to rectify it. However, as recent experience in the US economy demonstrates it is much to create a mess then to clean it up. A crash of the Chinese economy would send shockwaves through out the globe. From a US point of view who will buy our debt if China cuts down on it's purchases of US treasuries? This will likely push up yields, which will further exacerbate the long term budget deficit problem. According to the article "residential real estate prices soared 68 percent in the first quarter from a year earlier". I am hoping that I am wrong, but China is looking like the US 2006.
Here is an excerpt from the article followed by a full link:
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, a person with knowledge of the matter said.
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 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.
Full link here: _http://www.bloomberg.com/news/2010-08-04/chinese-regulator-said-to-tell-banks-to-test-for-60-drop-in-home-prices.html
Disclosure: None
