[By Yu Fangping/China.org.cn]

In a move to reassess the ability of domestic commercial banks to cope with the growing housing lending risks, the China Banking Regulatory Commission conducted a stress test on these lenders in the second quarter.

In a recent interview with China Central Television, Liu Mingkang, chairman of the banking watchdog, revealed the results of the test showed domestic commercial banks can endure a 50 percent decline in house prices.

However, this does not mean that domestic banks can turn a blind eye to the huge risks brewing in the country's real estate market. Instead, as Liu said, it means that the government will accelerate efforts to tighten risk prevention and control in house lending and strengthen management over house developers in the latter half of this year.

At the same time, the country will take measures to stop excessive bank loans from flowing into the housing market in violation of related State regulations and will continue to remain highly vigilant against real estate risks in the country's second and third-tier cities.

Liu's remarks portend that the lingering fund crunch facing developers will continue, meaning that domestic house prices are now at a crucial crossroads.

While expecting the last straw to fall on the stubbornly high house prices, many people are pinning their hopes on the country's vowed construction of affordable homes and its bid to develop some replacement industries as an important prop to bolster national economic development.

The latest round of regulatory policies and measures, which have been launched in a gradual manner, have added unprecedented pressure to domestic developers.

Since reform of the country's commercial house system, the pre-sale system has enabled domestic developers to make huge profits. It had become common practice for the funds needed for a real estate project to be made up of the developers' funds, bank loans and the income gained through home presales. Such a cost-sharing model has not only helped funds-lacking developers subsist, but has also helped them further develop and build up their strength.

But such a model will come to an end as the country continues to tighten its monetary and credit policies, which are expected to have an unprecedented effect on the funds composition of domestic housing projects.

From the perspective of their financing channels, currently domestic developers can no longer gain new loans from banks, one of their largest sources of funds in the past. The tightened bank credit has added huge pressures to housing developers following their failure to utilize financing channels and the issuance of IPOs to raise much-needed funds in the capital market.

Although some developers have managed to access trust funds in a variety of forms, the country's supervisory department is already keeping a close watch on this trend. More importantly, developers have to pay a high cost for their trust-based market financing. It is estimated that large-size housing enterprises currently pay 15 percent interest on their trust financing while small ones pay as high as 20 percent.

The reversal of the current housing market has also prompted developers to change their previous practice of reserving more houses for higher prices and instead prompted them to attract homebuyers with preferential or discount prices. It is reported that more than half of the housing projects in Tianjin are now on sale at a discount price. Undoubtedly, the increasing discounted home sales throughout the country are the catalyst for some delicate changes in the supply-demand relations in the domestic housing market.

In addition to monetary tightening, the administrative bans on home-buying by some authorities in big cities have effectively squeezed speculative demand. The conditional ban on home-buying has now spread from Beijing, Shanghai, Guangzhou and other big cities to the second and third-tier cities, which, if strictly implemented, will finally subdue the stubbornly high house prices.

However, at a time when domestic house prices still remain high and any decline in prices is not irreversible, concerns have emerged that a slump in the property market would trigger a hard landing of the national economy. Similar concerns in the past once caused the government to abort its otherwise effective regulatory measures on the real estate market.

To prevent this from being repeated, the country should review the role the real estate sector plays in national economy in an objective manner. It should drive home the fact that it is the construction sector other than the real estate market that has vigorously driven the development of some upstream and downstream industries.

Earlier this year, the central government promised to begin to build a total of 10 million guaranteed affordable homes nationwide by the end of the year. That target, if realized, will fill in the huge investment vacuum caused by the continuing slump in commercial house sales.

The author is a Shanghai-based economic commentator.