BEIJING, Sept 20, 2007 (AFP) - China's commercial banks are entering a high-risk period where they could face an avalanche of delinquent mortgage loans, state media said Thursday, citing a top lender.

China's banks could see a rapid rise in mortgage delinquency rates partly as a result of frequent hikes in the lending rate, the Xinhua news agency reported, citing a report from the China Construction Bank.

In the most recent hike this weekend, the central bank raised the lending rate by 27 basis points to 7.29 percent, the fifth time this year that the interest rate went up.

The rate hikes are meant to curb investment growth, but they are blunt tools that may also hurt people who borrow money to finance their homes.

The mortgage market is also a risky place because some mortgage recipients have cheated in their applications and spent the money not on new housing but on stock market investments, the bank said.

This is not a problem at the moment, as the stock market is experiencing a sustained boom.

But if the stock market suddenly collapses a large number of unlucky investors could wind up in a situation where they would be unable to pay back the loans.

The combined non-performing mortgages of the China Construction Bank, the Industrial and Commercial Bank of China and the Bank of China hit 19.2 billion yuan (2.6 billion dollars) by the end of 2006, the agency said.

This was up 4.3 percent from 18.4 billion yuan the year before, according to the agency.

The report advised the banking sector to strengthen loan application examination, set up and improve personal credit systems and raise the down-payment ratio for second home buyers.

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