China's banks will take "stress tests" to see if they can handle the housing price drops that are expected to happen this year.
The tests will see how a 30% to 50% drop will affect the banks, though many experts expect that the price dip will be around 20% to 30%.
“If property prices drop 50% we would be in big trouble; it would mean a hard landing for the economy,” says UBS Securities' chief China economist Wang Tao. The firm has pointed to China's real estate market as currently the most important factor in the global economy, because of its paramount importance to the country's economic growth.
The new stress tests will be broader in scope; previous tests only took into account the effect of price decreases on banks' loans to developers and mortgage borrowers without including the effect on loans with land and property as collateral.
Currently, house prices are still rising in China despite cooling measures. Property transactions rose in the first quarter of 2011 nationwide from a year earlier, but in the 10 largest cities the volume actually declined sharply by 40%.