Still, developers regard them as a domestic safe haven, while also moving their capacity to overseas markets such as the United States, Australia and Malaysia.

The bidding wars for the limited supply of parcels in China’s tier-1 cities are sending land costs above the selling price of existing flats in the immediate vicinity.

Official data showed China’s land price rise has far outpaced housing inflation in the past three years. A rising number of developers, including the aggressive luxury home builder Sunac China, have been expressing their worries over the situation.

The nationwide average numbers, however, disguise a more worrying fact that the land market in some small cities including Wuxi in Jiangsu province have been frozen, as developers are stranded in an oversupply and have no appetite to replenish reserves.

Even if they do, banks will not lend.

The average number of months to sell down inventory in tier-3 cities stood at 19.6 at the end of November, versus 11.2 in tier-2 cities and 8.9 in tier-1 cities, according to Daiwa’s Kan.

Rocketing land prices in top cities and an inventory glut in small cities are compressing the real estate industry’s average net profit margin, to below 10 per cent based on interim reports of listed developers, for the first time in history.

And the opening of cheaper funding sources, including about 200 billion yuan in onshore bonds this year, will fail to repair the profitability, nor their much stretched balance sheets.

Global ratings agency Fitch said more direct financing options, such as perpetual securities, real estate investment trusts and cooperation with cash-rich insurers, will evolve next year, but they will be unable to offset the exorbitant land prices in tier-1 and tier-2 cities.

To Fitch banking analyst Grace Wu, exposure to a property downturn is the biggest threat to Chinese banks as they rely heavily on real estate assets as collateral.

She estimates loans secured by property, including residential mortgages and corporate loans backed by property, make up 40 per cent of China’s overall loans, or as high as 60 per cent if taking into account the amount of non-loan financing to borrowers denied formal bank credit.

“Fitch views a protracted downturn in property markets as a slow probability, but high impact, scenario that could result in a credit crunch in financial markets and force a chaotic deleveraging process for corporate borrowers,” Wu said.

The high exposure means once land prices started to head south, pulling down housing prices too, banks’ non-performing loans which are already mounting in an accelerated pace will soar. It will also harden the life for other sectors that use land and property assets as collateral.

Besides, land premium is a major source of income for Chinese local governments, who rely on it to service 37 per cent of their outstanding debts as of the end of 2012, a national audit report said.

China’s debt-ridden local governments have been on a multi-trillion yuan debt swap programme, which will dent banks’ net profit margin in the next few years.

Data from the central bank showed outstanding property loans made up for 21.9 per cent of overall lending in local currency at the end of September. The ratio has been trending up in the past four years, although top banks have been constantly talking about a strategy to cut their exposure to the real estate sector.

“That means private investors who have been investing through non-banking channels including peer-to-peer platforms are leaving,” said Feng Ke, deputy head of the Economic Research Institute at Peking University. “But banks have to lend more as the government does not want the real estate market to collapse.”

Analysts warned that developers have spent cheaper funds to stoke the fire in top cities’ land market, fuelling their future expansion rather than redeem expensive existing bank loans or offshore bonds.

“Big developers have healthy cash flows,” said Jiang Yunfeng, a research director at mainland property consultancy China Real Estate Information System. “But the industry’s overall debt ratio is higher than in 2012.”

Data from the statistics bureau showed Chinese property developers’ average debt to asset ratio worsened steadily from 72.3 per cent in 2008 to 75.4 per cent in 2011 and then dipped to 75.2 per cent in 2012. It does not provide figures for the past three years.

High gearing amid an economic slowdown is spurring warnings from credit ratings agencies against corporate defaults next year and the real estate sector is often singled out as the most at risks alongside other industries that suffer from a glut, such as metals and mining.