Results of a recent stress test show that commercial lenders in China can take as much as a 40 percent decline in property prices, and the general risk in property loans is controllable, said the top banking regulator Liu Mingkang on Wednesday.

By the end of August, outstanding property loans among Chinese commercial lenders stood at 10.4 trillion yuan ($1.63 trillion), 19.8 percent of the total of outstanding loans. "The proportion is far less than that of many European countries and America," said Liu, the chairman of the China Banking Regulatory Commission (CBRC).

He said limited and relatively simple securitized products among lenders in China and the 189 percent coverage of collateral to loans made to property developers all point to the conclusion that the total risk in property lending is controllable.

In addition, non-performing loans among banks, including rural mutual cooperatives, related to the property market are still less than 2 percent, and are declining in some regions, Liu said.

To curb increasing risks as the government cools the property market, the CBRC told lenders in July not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial than residential properties, Bloomberg reported.

Liu had previously told China Central Television in July that banks can withstand as much as a 50 percent drop in property prices.

China's housing market started correcting, but Beijing probably wants to see more, said Yao Wei, China economist at French bank Societe Generale SA.

There are clearer signs of cooling in China's property sector. September residential property sales increased by 9.5 percent year-on-year in volume, 4 percentage points lower than the previous month. The sales value increased by 10 percent year-on-year, 15 percentage points lower than in August.

The implied price gains dropped to only 0.5 percent year-on-year in September, down from 10 percent in August.

"We think September probably marked the beginning of a correction, but the central government wouldn't want to stop tightening just yet," Yao said.

She said the cues from Beijing indicate a target price correction of 5 to 10 percent, and China is still a few months away from general policy easing.

"Considering the difficulties of managing the pace of deflating a bubble, we expect some risk of undershooting and risk of a 10 to 20 percent downside in China's property prices."

Apart from property risks, commercial lenders also face risks from lending to local governments through financing vehicles, "shadow" banking and private financing activities, Liu said.

The risk of lending to local governments is generally controllable, he said, although bank loans accounted for 80 percent of the 10.7 trillion yuan in local government debt.

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