By Patrick Jenkins and Simon Rabinovitch in Beijing and Robert Cookson in Hong Kong

The financing problems affecting Chinese real estate developers could help an overheating sector let off steam and prevent a dramatic property market collapse, according to senior government officials.

Investors have reacted with alarm to signs that Chinese developers are struggling to fund their operations, fearing they could presage a collapse of the sector that would affect the entire country and hit one of the last remaining sources of growth for the global economy. The stocks and bonds of Chinese property developers have been battered this year, with the sell-off accelerating in recent weeks.

In interviews with the Financial Times, two regulators said that tightening measures over the past year had been aimed at choking off credit flows to poorly managed developers in China?s unruly housing market.

?There are some developers who are facing funding pressure or have even been cut off. This is something we are happy to see,? said one of the officials, who asked not to be identified. Developers were like ?dragons and fish jumbled together?, he added, referring to a mixture of high and low-quality companies for whom a consolidation process was ?very necessary?. The second official estimated there were 50,000 property companies in China and that it was important for the market to work out the ?survival of the fittest?.

With property transactions slowing dramatically and prices starting to fall, some investors think it is only a matter of time before Beijing backs down and reopens credit channels for developers. But the officials said such a volte face was unlikely.

?If a couple of real estate companies fail because of bad management practices, then they should fail,? said one. ?The banks who lent to them should be punished through higher non-performing loans. As long as that doesn?t become a big systemic crisis, that?s fine.?

Chinese housing prices soared from late 2008 to 2010. The government has addressed the rise over the past year by raising mandatory mortgage downpayments and ordering banks to lend less. A state bank executive said he saw no evidence of any relaxation in the clampdown, adding that the government wanted to see ?the big [developers] eat the small?.

? The Financial Times Limited 2011