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China's property market could be headed for a “meltdown'' as home prices and sales slump, hurting profits at developers and banks, Morgan Stanley analysts said.

“Property prices are already cracking in China in major cities,'' the investment bank's analysts, led by Jerry Lou, wrote in a note today. “We believe the likelihood of a property sector meltdown is high. The impact on banks' earnings may be substantial.''

Property demand in Chinese cities has dropped by as much as half since the government last year raised minimum down payment requirements and increased rates on some mortgages to cool home prices, according to CSC Securities HK Ltd. analyst Liu Bin. A 60 percent drop in the stock market this year and concerns that economic growth in the world's fourth-largest economy is slowing have contributed to the slump in demand.

“None of the developers we look at are free from potential solvency issues,'' the Morgan Stanley report said, referring to five companies traded in Hong Kong. “Needless to say, they also have serious earnings risks.''

Agile Properties Holdings Ltd. “seems to be the best positioned when it comes to earnings impact and solvency risk,'' said the report. Guangzhou R&F Properties Co., the biggest developer in the Southern Chinese province, faces the worst solvency risks, while Shimao Property Holdings Ltd fast cash now. and KWG Property Holding Ltd. are the worst in terms of earnings risks, the report said.

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Agile, which this week said first-half sales fell 28 percent, declined for a fourth day in Hong Kong, dropping 0.7 percent to HK$4.07 at 10:43 a.m. The stock has lost 72 percent of its value this year. Guangzhou R&F fell 1.7 percent to HK$9.20. Shimao slid 4 percent to HK$5.81, while KWG declined 3.3 percent to HK$2.37.

Developers including China Vanke Co. and Poly Real Estate Group Co. have reported falling sales as government lending curbs deterred home buyers. China Vanke, the nation's biggest publicly traded real-estate developer, said this week sales in August fell 35 percent from a year earlier, the third monthly drop.

Vanke said in a statement today it has rejected demands from buyers for compensation on homes bought before the company cut prices to boost sales. The Shanghai Morning Post had earlier reported Vanke may compensate the buyers, according to the statement.

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