Bracing the financial sector 

In contrast to exporters and purchasing managers, Chinese regulators are concerned, particularly over the financial sector and - as an ongoing source of trepidation for the Chinese economy in 2010 - the housing market. Statements from government officials in the last month suggest the need for home prices to actually decrease, not just stall, in order to reach an affordable level for China's citizenry. Banks have been prepared for just such a scenario. China Banking Regulatory Commission (CBRC) ordered stress test in August for the nation's banks to assess the consequences of a 60 percent drop in real estate prices. Reported results boasted of a mere 1 to 2 percent increase in non-performing loans, as Chinese homebuyers are less leveraged than those in most countries. Loans to property developers and homeowners currently account for 18 percent of all outstanding loans for China's banks.

To achieve lower real estate prices the National Development and Reform Commission Chairman Zhang Ping announced the need for further regulations to thwart property speculation. Current price movements suggest that the flurry of policies enacted earlier in the year may not have been enough. China's House Price Index peaked in May and continued to fall through July. Yet unofficial figures show a rebound in home sales in August; prices are at pre-policy levels in Guangzhou and reportedly over 12 percent higher for the month in Beijing.

The CBRC has become aware of banks' securitization of loans through the use of trusts, effectively moving them off their balance sheets and outside the scrutiny of regulators, and has worked to prevent it. In July the use of trusts to securitize loans was suspended. By 2011, these outstanding loans must be moved back onto the balance sheets of Chinese banks and backed with capital to a ratio of 150 percent as a contingency for default.

In addition to curbing excess demand for housing, authorities are also working to expand supply in an attempt to bring down prices. China's Ministry of Land and Resources is in the process of sequestering idle plots of land and preparing under-utilized areas for upgrades. A total of $59 billion has been allocated for the development of 5.8 million new affordable housing units, which are scheduled for completion by the end of the year. By 2011, 6 million more units will become available.

Although a milestone was reached in August, as China became the world's second largest economy, it seems the work of Chinese officials is far from over in the financial sector.