China's banking regulator said the risks associated with nonperforming loans, including those to property developers, remain controllable in spite of restructuring in the industry and an economic downturn.

The banking sector's asset quality is relatively stable, and loans to industries with excess capacity don't account for a large proportion of the total, Wang Zhaoxing, vice-chairman of the China Banking Regulatory Commission, told a news conference in Beijing on Friday.

Wang said that the potential risks of loans to local government financing vehicles and the property market "can be managed".

He added that domestic commercial banks had improved their risk management in recent years by increasing their capital adequacy ratios as well as provisions for loan losses.

Nonetheless, the government is still keeping close watch on financial risks.

The regulator will move to deflate bubbles in the property market for fear that excessive reliance on the real estate industry for growth and high leverage in the sector could cause "catastrophic" damage to the Chinese economy and financial system, Wang said.

"We will urge banking institutions to conduct stress tests and improve their capacity to cope with risks," he said. "The government will focus on developers' financial condition, including their capital and cash flow, and take proactive measures to avert any financial risks arising from liquidity problems."

China will continue to support lending to first-time home buyers and projects involving affordable housing and urban renovation, he said.

Real estate loans account for about 20 percent of total bank lending and individual mortgages represent 75 percent of all real estate loans. The NPL ratio for mortgages is less than 1 percent, according to CBRC figures.

While China is tightening its grip on financial risks, it will also maintain "appropriate" credit supply and social financing growth to ease financing difficulties for small businesses and lower borrowing costs. The government will develop policies to ensure that funds flow to industries and companies that need them the most, Wang said.

The CBRC will soon ease rules on banks' loan-to-deposit ratios, which at present can't exceed 75 percent, by including certain "stable" sources of deposits in the calculation and removing certain items from loans, he said.

Banks may also be more lenient in dealing with bad loans to small businesses as long as their NPL ratios are kept within a certain range, and that won't affect the regulator's evaluation of banks' risk management performance, said Yang Liping, the CBRC director in charge of smaller national and city commercial banks.

jiangxueqing@chinadaily.com.cn