In Shenzhen, a city in south China's Guangdong Province that led the nation in high home prices last year, housing prices dropped the fastest this year. In June, the local statistics bureau reported that newly built residential space was sold at an average of 11,000 yuan ($1,618) per square meter, a 36-percent decrease compared with that of last October when home prices peaked. But such declines in home prices have caused financial problems for many mortgage lenders, because the current prices are lower than the amount of the borrowers' bank loans.

Junlinshan, an apartment project in Shenzhen, started to sell homes at the end of 2007. Earlier this year, Deng Li, a 30-year-old who works in the media industry, bought a 60-square-meter apartment for 11,500 yuan ($1,683) a square meter. But on July 17, Junlinshan's website showed that the developer had cut its price to 6,888 yuan ($1,009) per square meter, including 700 yuan ($102) worth of decorations per square meter. The price, in fact, fell more than 40 percent in half a year.

According to Deng, her apartment is worth 400,000 yuan (about $60,000) now, but she owes the bank more than 500,000 yuan (about $73,000) in loans. She says she is in a dilemma.

"If I continue to pay on the mortgage, I will have to pay 1.4 million yuan (about $200,000) to the bank, including interest," she said. "But at present, I can use the 1.4 million yuan to buy a much larger and more comfortable apartment.

"If home prices continue to fall like this, I will have no choice but to stop paying the mortgage."

Many mortgage lenders agree with Deng, saying that they would rather let the bank take away their houses than continue to pay for mortgages that keep losing their value.

Wang Keqin, a client manager at ICBC Credit Department, said if home price fell less than 30 percent, the bank could sell its mortgages to make up for the credit losses if borrowers defaulted on their payments. Still, banks could find themselves with an increasing number of bad loans that could cause a crisis, he said.

Bankers also are considering how they might be affected by the subprime mortgage crisis that started last year in the United States and spread to mortgage markets in other countries. Many borrowers in the United States and elsewhere have defaulted on their loans because of sharp declines in home prices. As a result, major financial institutions such as Citibank have incurred tremendous losses. This has raised further concerns about how Chinese banks would be able to deal with large numbers of defaults and whether they might suffer huge losses.

A need to worry?

Economists generally believe that the current 10-percent drop in home prices would not have any negative repercussions on Chinese lenders. But if home prices fall 30 percent-the amount usually required for downpayments on new home-banks could experience a credit crisis.

Ding Zhijie, a finance professor at the University of International Business and Economics in Beijing, said that possible defaults here would have a different impact than they have had in the United States. When Chinese commercial banks issue home loans, they require downpayments that are more than 20 percent of the homes' cost. In addition, most borrowers have good credit records. By contrast, most of the subprime mortgage borrowers in the United States usually only had to pay downpayments that were 5 percent of their homes' cost.

Also unlike American mortgages, Chinese mortgages are not subprime loans, but prime loans, Ding said. Mortgage loans here only account for 11 percent of all bank loans, he added. But in developed markets such as the United States, they could comprise half of a bank's total loans. With this in mind, Ding said he believes that falling home prices in China would have a limited impact on the country's banking sector.