China's banking system can withstand a huge drop in the country's economic growth or even a 400 percent rise in non-performing loans after the central bank said Chinese lenders have passed a crucial stress test.

The People's Bank of China (PBOC), which is the country's central bank, said the banking system passed the stress test it conducted at the end of 2013.

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The test was carried out on 17 domestic banks to determine their response to banking events that could affect their operations.

The banks were tested on how they will be able to respond to a sudden increase in bond yields or non-performing loans and how will it perform if China's economic growth will slow to 4 percent from the current 7.4 percent on average.

In its annual financial stability report, the PBOC said the asset quality and capital adequacy of the country's 17 commercial banks, which account for 61 percent of China's total banking assets, are relatively high.

Even under light, middle and heavy stress scenarios, China's banking system will still be operational with high capital adequacy and asset quality, the PBOC report said.

The report added that even under the most serious stress scenario, the bank's capital adequacy will not drop below 10.5 percent.

However, the PBOC revealed that one bank failed in the middle-case stress scenario while three banks failed to meet liquidity ratio requirements under the worst-case stress scenario.

The central bank, however, did not reveal the name of the said banks.

The Chinese government has been closely monitoring the country's financial system with the slowing economy, rising debt ratio, and industrial over capacity.

The government earlier said it will soon release guidelines on Internet financing and will monitor the growing shadow banking industry in order to protect the country's commercial banks.

TagsChina Banks, Stress Test, Central Bank, PBOC