Is China’s property sector facing a day of reckoning?

Leslie Shaffer | Writer for
Curbing of property loans not a government action: Credit Suisse

China's property and bank shares sold off sharply as local media reports that some banks are cutting off financing to the property sector suggested long-simmering housing risk may be heading toward a boil.

The stocks' tumble followed local media reports that banks are tightening property loans, with the official Shanghai Securities news reporting Monday that Industrial Bank may have stopped some loan types altogether.

(Read more: China's home prices stabilize, developers tumble)

Residential apartments at the Sino-Singapore Tianjin Eco-city in Tianjin, China
Tomohiro Ohsumi | Bloomberg | Getty Images

The Shanghai Composite traded off as much as 2.6 percent intraday, while the property subindex traded down as much as 6.1 percent before retracing some losses. Bank shares also took a hit, with some trading off as much as 7 percent intraday.

Industrial Bank appears to have ended bridging loans to property-related sectors, including developers as well as suppliers such as cement makers and copper players, said Hao Hong, managing director of research at Bank of Communications.

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"The concern is that some of the banks may follow suit," he told CNBC. "It is quite serious because it will cut out quite a bit of financing for the property sector," he added, noting the outsized contribution that the property sector makes to China's economy.

Capital Economics estimated that the property sector contributed 9.5 percent of China's gross domestic product (GDP) in 2013.

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"It's safe to say that the risk of the property sector has been brought back into focus at many banks," Hong added. While Hong noted cutting off bridging loans is more likely to affect smaller players in the sector, the recent strength of property prices has also increased the risks that the government may step in with further measures to cool the sector.

In January, China's home price growth slowed for the first time in 14 months, rising 9.6 percent from a year earlier, after December's 9.9 percent increase, according to Reuters data, although prices still rose in 69 of 70 cities on an annual basis.

Even if banks do begin cutting off loans to property-related players, that doesn't necessarily mean funding entirely dries up.

The larger overseas listed developers have access to offshore capital, while smaller ones can sell some of their projects or use alternate financing, such as private wealth-management and trust products, said Du Jinsong, head of Asia property research at Credit Suisse. To be sure, the government has moved to slow the growth of these "shadow banking" funding channels.

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But he added, "the whole sector plunged today not because of the tightening to the developers per se, but to the news that many of the banks have delayed or temporarily stopped giving out mortgage loans," he said. "To me that is not new news, but it has been reported very widely over the weekend."

So far, he doesn't believe these steps have been dictated by the government, which has been trying to slow credit growth to overheated sectors including property.

"I think it's a market-oriented action by the banks themselves because they want to protect their margins and also fix the problem of duration mismatch. I do think that this is basically the individual banks' initiatives," Du added.

Others aren't sure whether the reported Industrial Bank move indicates any sort of trend.

(Read more: Get ready for more China shadow-banking defaults)

"The Industrial Bank's decision may suggest some changes in its perception on the property sector, but we note that the Industrial Bank is known for its aggressive stance in innovative financing," Bank of America Merrill Lynch said in a note. "It might be time for the bank to be a bit more conservative."

The bank believes mezzanine financing for developers and funding for upstream suppliers, such as cement and steel producers, likely account for only a small part of banks' exposure to the property sector, with the majority usually from mortgage financing.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1