The slump that hit China's property market this year could hit the country's banks according to ratings agency Standard & Poor's, in the latest warning to the world's second largest economy.
While the housing market in China has started to see some recovery of late, with data released at the start of the month showing house prices rose at their fastest pace in 18 months, weakness seen earlier in the year could have "negative knock-on effects" for domestic Chinese lenders, S&P warned.
"We continue to monitor the impact of Chinese developments on regional credit quality. We believe that the weakening Chinese property market could have an intermediate negative impact on the Chinese financial institutions sector," the ratings agency warned in its annual outlook on banks, released late Tuesday.
"Moreover, our view is that a major disorderly property adjustment in China, though not our base-case scenario, would have a significant negative impact on many of the region's banking sectors, including China itself," the group added.
In spite of being the world's second-largest economy, China grew at its slowest pace in 24 years in 2014, undershooting the government's target for the first time since 1998.
This sharp slowdown was largely put down to the major fall in property prices, which is seen as one of the major risks for the economy. The People's Bank of China cut benchmark interest rates four times since November in an effort to ease the cost of mortgage repayments.
The central bank also cut the amount of cash reserves commercial banks are required to hold in May, in an effort to take some pressure off Chinese lenders.
S&P also mentioned its concerns over the recent severe sell-off seen in equities, but said the issue appeared to be contained, for now.
"We believe that contagion risks from the sharp fall in China's equity market to the rest of the Chinese financial system remain manageable, at least for the time being."
"Contagion risks for China may increase significantly, however, if the correction in the equity market turns into a collapse, in our view. Chinese securities firms, and possibly other types of nonbank financial institutions that may have sizable equity exposures, would become a weak link in the financial sector under such a scenario. More generally, we note that China's equity market performance remains a side issue for the Chinese economy," the agency said.