The term “bank stress test” has been floating around in the news quite a bit lately with the Europe testing its banks to rebuild investor confidence. China will now join in the fun and conduct one of its own. Last year, China carried out stress tests with the assumption of home prices dropping by up to 30 percent; this time around, China said it would make the test even more rigorous, testing the ability of its banks to withstand home prices falling as much as 50 to 60 percent in cities where prices have risen the most dramatically. The tough standards of China’s stress test makes Europe’s own stress test look like a farce.

While the move suggests that Chinese policymakers are concerned about the health of the real estate market, it also shows, as usual, the communist government’s pre-emptive and no-nonsense approach in managing its economy. The severity of the adverse scenario (up to 60 percent price decline) to be used in the stress test in the most lucrative real estate markets is more policymakers wanting to make sure its banks can handle the worst case scenario rather than them believing that a 60 percent drop would really happen.Read more...