Chinese Banking Regulators Admit The Last Stress Test Was Too Easy, Underestimated Mortgage Risk

china storm

Photo: Associated Press

Chinese banking regulators have admitted that recent financial stress tests weren’t as rigorous they seemed.This should have been obvious when basically all the banks registered as solid. An anonymous banking exec told Caixin: “The results were too good to believe, even for us. So now, more special surveys are coming.”

To prove how much the stress tests missed, the China Banking Regulatory Committee recently surveyed 60 large real estate development groups, according to Caixin:

In that check, investigators found 426 of 847 firms affiliated with these developer groups were operating with credit lines at more than two banks, and 90 had established credit at more than five banks.

The 60 groups operate a combined 4,266 subsidiaries – an average 71 subsidiaries per group – with 15 groups sliced into more than 100 subsidiaries. Moreover, weak corporate governance makes it possible for these groups to commonly finance investments across regions, borders and even industry segments.

Eighteen of the 60 have average debt-to-asset ratios exceeding 70 per cent, the source said, while ratios at 64 subsidiaries exceed 90 per cent.

And so forth. These real estate groups have high debt levels with loans out to anyone who will give them money. In other words, financial risk in a housing crash is higher than it seems.

The only bright side is this: At least someone cares about legitimate risk management.

Now check out why Shanghai Real Estate is the most obvious bubble ever >

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