Commodity prices and cyclical stocks were the first to respond to the story that China is getting more tough in the stress tests they are demanding from their banking system. The stress test news is not new but the degree of assumptions is and now seems to be as much as a 60% price haircut to property prices in the most overheated markets (major cities) vs a previous request of the banks of a 30% price decline. Chinese banks have been raising a lot of money lately in order to firm up their balance sheets but I don’t know if the capital is enough or not if the worst case property decline takes place. On one hand, it’s scary that Chinese officials think a 60% price decline is a possibility that needs to be taken seriously but on the other, they are not messing around and are planning for the worst. While a 50- 60% drop is certainly alarming, it matches the declines seen in the hardest hit US markets.
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