Markets

Even China-Syndrome Stress Tests Won't Faze Chinese Banks, Chinese Say

By Constantine von Hoffman

Updated on: July 29, 2011 / 6:50 PM EDT / MoneyWatch

Bank stress tests, done to reassure investors, are dogged by questions about how stressful the tests really are. So what to think of China's tests, which show banks able to withstand a complete meltdown?

China's bank regulator has declared the country's lenders can withstand a 50 percent fall in property prices. Fifty percent? That's a full Chernobyl. Is there a banking system in the world that could handle that?

Liu Mingkang, chairman of the China Banking Regulatory Commission, made it extra extra extra clear that in no way did he think real estate prices were in any danger whatsoever of doing this.

The stress tests do not reflect the CBRC's view about the property market's direction, but the results should strengthen the confidence of all banks in implementing the property controls. ... The result of the stress test has told us, in the worst scenario, even if housing prices drop by 30 or 50 percent, banks are still able to handle the non-performing loans.

The CBRC had only run the tests to reassure everyone about the government's efforts to cool down China's runaway real estate market. Really. That's the only reason. China's housing-inflation rate was 4.2 percent in June, up from 4.1 percent in May.
The announcement sparked a rally in Chinese bank stocks among people who were likely also making offers on the Golden Gate Bridge funded by that check which is definitely in the mail.

In the understatement of the day the FT noted, "The regulator's faith in the banking sector's resilience may not be well founded." The FT's collective eyebrow was arched so high you could launch satellites from it. Reuters didn't even have that slight warning in its story on the topic. The news agency reported the story with the same lack of skepticism found in stories about the pronouncements of Western central banks.

Yikes.

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