Chinese banks can withstand a 50% decline in property prices, the chairman of the country's banking regulator said, citing the results of the latest stress tests.
Liu Mingkang told state-run China Central Television on Friday that the tests aren't a reflection of the regulator's view on China's property market, but they show banks will be able to press ahead with curbs on credit to the property sector.
"The stress-test results showed that under the worst case scenario in which property prices plunge by 30% or 50%, banks can still withstand the pressure from nonperforming loans," Mr. Liu said.
To avoid economic damage from a worrisome property bubble, China has pushed ahead with an array of measures to contain spiraling home prices, including higher mortgage rates and limits on house purchases.
The government has most recently vowed to extend curbs on purchases, already in place in major cities, to second- and third-tier cities.
The television report didn't give fresh details of the stress tests.
But with growing concerns over the health of the nation's banks, the China Banking Regulatory Commission has in the past two years ordered banks to stress-test their loans to the real estate sector to measure the impact of possible declines in property prices. These tests include assumptions such as massive deposit withdrawals, an increase in fundraising costs, a credit rating downgrade and the bankruptcy of some borrowers.
Mr. Liu said China's banks have set aside 1.3 trillion yuan, or about $202 billion, in reserves against potential bad loans, and that is enough of a cushion against declines in real-estate prices.
Banks have also slowed lending to the property sector. Central bank data show that net new property loans in the first half, including credits to developers and home buyers, fell 43% from the year-earlier period to 791.2 billion yuan.
But analysts said the stress tests aren't meaningful and can't remove problems from excessive borrowing by local governments, which are highly reliant on land sales to repay bank loans.
"Without a doubt a 50% drop in any country's property prices will bring about a hard landing to the country's economy, so how can banks survive something like that?" said Lu Zhengwei, an economist with Industrial Bank.
Li Lei, an analyst at Gold State Securities, said Mr. Liu's comments look supportive of banking stocks, but "there is still the problem of local government debt, which is of greater concern to investors."
