"It took me at least four years to save the 500,000 yuan, but the money evaporated within eight months!"

Li, 30, bought a two-bedroom apartment in the capital's Tongzhou district in February at 19,800 yuan a square meter. The price now is 13,400 yuan.

His case is not unique. With more property developers suffering cash-flow problems, under the government's tightening measures, they are making wider and deeper price cuts across China's major cities.

According to SouFun Holdings Ltd, owner of one of the country's biggest real estate websites, prices dropped in 58 of 100 sample cities in October, with the month-to-month decline increasing from 0.03 percent in September to 0.23 percent.

The number of cities experiencing falls also set a record for the year last month.

It is an interesting dilemma: Property developers finally reduced home prices, as the government desired, but they have felt a backlash from early homebuyers. In Beijing and Shanghai, the higher-than-expected price decline has triggered strong protests from earlier buyers, with some agitated people storming sales offices and asking for refunds.

Moreover, if home prices fall too far and too fast, will the drop undermine China's economic growth?

Property investment has accounted for nearly one-fourth of fixed asset investment, and land sales remain a key source for local governments' revenue, making real estate a major driver for China's economic growth.

Expect further drops

The central government, which has shown its determination to stay the course, seems confident that it can squeeze air out of the real estate bubble while maintaining a healthy growth rate.

Premier Wen Jiabao said in late October that the government would firmly maintain control over the property market - methods have included restrictions on home purchases and bank loans - even as it seeks to fine-tune other economic policies.

"I will especially stress that there won't be the slightest wavering in China's property tightening measures. Our target is for prices to return to a reasonable level," Wen said.

The increasingly cramped cash flow has led more property developers, including such large ones as Vanke and Longfor, to cut prices by a bigger margin.

"The decline in home prices is just beginning. And this price adjustment will cut deeper than was the case in 2008 to 2009," said Chen Li, head of China equity strategy at UBS Securities. "The fluctuations in the property market, in fact, may pose the biggest challenge to China's economy next year."

According to Zhang Dawei, marketing director of Centaline Group in Beijing, price cuts will spread from the suburbs into urban areas and from large apartments to small and medium-sized ones.

"Homebuyers' confidence has hit bottom," Zhang said.

Qi Tao, a lawyer in Shanghai, had planned to buy an apartment before the end of the year for his imminent wedding, but has changed his mind. "The price may drop further in the first quarter of 2012 if the government continues those tightening measures," he said.

Enough potential buyers like Qi have decided to wait things out that sales in the third quarter, a traditional high season for real estate, were unsatisfactory.

According to the third quarter report released jointly by Knight Frank and Holdways, international real estate brokerage companies, the total area of property sold in 20 major cities fell by 17.3 percent year on year, 1.6 percent quarter on quarter.

The so-called transacted areas of new homes in Beijing dropped 18.3 percent year on year, Shanghai dropped 21.8 percent, Guangzhou 15.7 percent and Shenzhen 8.7 percent. Ten other cities showed decreases of more than 10 percent. For Chongqing and Hangzhou, declines exceeded 50 percent.

JP Morgan said in a recent research note that steeper declines may lie ahead, and prices nationally could fall 5 to 10 percent - as much as 20 percent in some major cities - over the next 12 to 18 months.

"The correction has just started, but the likelihood of a nationwide collapse is very small, as bursting the bubble is clearly not part of the policy objectives," the note said.

Thomas Lam, head of research at Knight Frank in Greater China, said that since the growth of home prices has started to become controllable, the government is unlikely to launch further new tightening policies, although current policies are not expected to be relaxed in 2012.

"We expect property prices would only slightly adjust next year, while local governments could fine-tune their policies based on the cities' individual cases," Lam said.

Industry shuffle

Finance difficulties produce the No 1 headache for property developers, whether public or private companies.

Statistics from Zhejiang Hexin Flush Network Services, developer of stock analysis software, show that the average debt-to-asset ratio for 133 property developers listed on the Shanghai and Shenzhen stock exchanges rose to 63 percent by the end of the third quarter.

The ratios for 80 of those companies were above the average. Seven were over 85 percent.

According to Stephen Ip, infrastructure and real estate industry lead partner for KPMG China, property developers have found refinancing increasingly difficult, but worse situations could develop.

"Although the debt-equity ratio of some listed property companies have exceeded 100 percent, they still have alternatives to maintain operations, such as issuing convertible bonds or preferred shares to international institutional investors, selling project stakes and cutting prices to stimulate sales," he said.

Some larger developers, with better cash flow, are working to sharpen their competitiveness to stand out in a fierce market.

Shenzhen-based China Merchants Properties Development, one of the country's top four listed real estate companies, will invest more in research and development to make its products more environment-friendly.

"Though building green products will add to our cost by some 5 percent, it will help us attract more customers and improve our competitiveness when expanding into other regions," said Hu Jianxin, the company's deputy general manager.

Hong Kong-listed Beijing Capital Land aims to improve its commercial facilities when building residential projects. President Tang Jun said the company plans to construct five large outlet malls within three years to make its residential developments more attractive. It is also preparing to launch a call center to improve its customer relationship management.

Meanwhile, some property developers are facing real risks of bankruptcy in the coming months, and more distress-caused mergers and acquisitions can be expected in 2012, Ip said.

"A number of institutional real estate funds, mainly from the US, Singapore and Japan, are actively seeking opportunities in the market, competing alongside domestic buyers," Ip said. "Commercial real estate, such as office, retail and mixed-use developments in good locations, instead of residential projects, are their primary target assets, considering the comparatively lower risks."

China Merchant Property's Hu held a similar viewpoint. "As long as the rigorous property measures continue, especially the financing channels remaining tight for both property developers and homebuyers, a large-scale industry reshuffle is expected in 2012.

"For property developers with a sound balance sheet and business structure, however, the shuffle also provides a good chance to expand market share," Hu said.

In equity-exchange venues at Beijing, Shanghai, Tianjin and Chongqing, more than 600 property companies or projects have been sold this year, more than double the number in 2010, according to the China Securities Journal.

When is it too much?

What would happen to China's investment and economy if property prices dropped 30 percent? This is a question international investors ask often.

For UBS Securities, the answer is fairly simple: Both fixed investment and the economy would go into a hard landing.

"Property investment accounts for more than 20 percent of total fixed investment and we estimate that almost 30 percent of final products in the economy are absorbed by the property sector," said Wang Tao, a UBS Securities economist.

A collapse of property prices, properly measured, would likely be caused by a collapse in sales for an extended period and accompanied by a collapse in property construction.

"Given the importance of the sector to the whole economy, a hard landing would be hard to avoid," Wang said. "Such a property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now."

Chinese officials hold a different viewpoint.

Liu Mingkang, former chairman of the country's banking regulator, reiterated on Friday that Chinese banks will be able to cope, no matter what. "Even if property prices drop by 50 percent, the banks' provision rate could still reach 100 percent - meaning the banks' principal remains safe - though interest may suffer a loss," Liu said.

As of the end of August, outstanding property loans among Chinese commercial lenders stood at 10.4 trillion yuan, 19.8 percent of the total of outstanding loans. This ratio is much lower than the average international figure, usually around 50 percent for Europe and the US, Liu said.

However, some industry analysts said such a calculation is just a static estimation.

"Considering that most of local governments' bank loans are backed by land value, once the home price drops, the land price also falls," UBS' Chen said. "At that time, the local government may need other things to fill up the value gap, indicating potential risks for bad loans from local debts."

Chen Keyu contributed to this report.