Property transactions in China’s largest cities have fallen to dangerously low levels, according to regulatory documents obtained by the Financial Times.

According to the documents, earlier this year the China Banking Regulatory Commission ordered domestic banks to weigh the impact of a 30 per cent decline in housing transactions in “stress tests” aimed at determining the health of the Chinese financial system.

While Beijing has been trying to rein in sky-high property prices, a China property slump would have a big ripple effect on the global economy. Construction of property accounted for more than 13 per cent of China’s economy last year.

In April the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year-on-year in China’s 15 biggest cities , according to government data. Nationwide, transactions dropped 11.6 per cent, up from a 7 per cent fall in September.

The fall-off in transactions has affected developers’ cash flows and, in some cases, their ability to repay bank loans. Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were cited by the International Monetary Fund this month as one of the Chinese financial sector’s biggest risks.

The CBRC has not released the results and declined to comment. But one analyst who reviewed the stress-test documents said that they did not take into account the impact fewer deals and lower property prices would have on bank collateral. “If developers can’t sell property and local governments can’t sell land, it’s hard to see why banks would be any better at either task under such conditions,” the analyst said.

Chinese officials admit privately that the tests need to be improved. One senior official said that banks were often unaware that loans to big state-owned enterprises had been funnelled to real estate subsidiaries, and acknowledged that the impact on collateral had not been fully taken into account.

The weaknesses in the Chinese scenarios echo earlier problems with stress testing in the European Union, where regulators underestimated the potential impact of a sovereign debt crisis.

While Beijing’s drive to cool the property market has had its intended effect, some analysts worry that the government has underestimated the impact its measures are having and if necessary will not be able to shift gears quickly. The measures, including higher downpayments, have taken nearly two years to gain traction.