One of Wednesday's news items that is not getting enough exposure is China's decision to conduct stress tests on its lenders. Not just any old stress tests, but ones that gauge the impact of property prices falling as much as 60 per cent.
Bloomberg News has some of the details: "Banks were instructed to include worst-case scenarios of prices dropping 50 per cent to 60 per cent 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 per cent."
And: "The tougher assumption may underscore concern that last year's record $1.4-trillion (U.S.) of new loans fuelled a property bubble that could lead to a surge in delinquent debts."
While the 60 per cent number is alarming, concerns about China's property market have been circulating for some time. As the Bloomberg article pointed out, Kenneth Rogoff, the former chief economist of the International Monetary Fund, warned last month that the Chinese market is beginning to "collapse."
The Economist's Free Exchange blogger sounds somewhat relieved, though, that Chinese authorities are at least signalling that they are getting ahead of potential problems: "One wonders how the global recession might have played out had American officials demanded stress tests modelling large property price declines in 2006 rather than in 2009."
But still, the consequences for the rest of the world if China starts to bolster its banking system in preparation for a property market collapse can't be good.