A state crackdown on China's colossal property market has helped send one of its biggest developers to the brink of collapse, and analysts warn the fallout could lead to the bursting of a bubble that has been building for more than two decades.
China's property market has been a critical part of the economy, as Beijing's promise to improve people's living standards translated into new homes that in turn fueled massive construction.
Hundreds of millions of middle-class Chinese see property as a key family asset and status symbol, said Agence France-Presse.
China's housing scene took off after key 1998 market reforms that boosted the private market from employer-designated homes -- rocketing in a breathtaking building boom on the back of rapid urbanization and wealth accumulation.
But, as prices soared, an anxious Beijing fretted about wealth disparity and the potential for social instability.
The average apartment price was 9.2 times disposable income last year, according to services firm E-House China, pricing many out of the market.
Highly leveraged developers have also prompted fears of financial instability.
Last year, Beijing introduced metrics to cap debt ratios called "three red lines" and tightened scrutiny over crucial funding raised by pre-sale deposits.
The plan was "to reduce the risk of the riskiest", said Dinny McMahon, of consultancy Trivium.
"The idea was that this would be a mechanism to force the most risky developers to pare back their debt levels," he added.
"And those that were less risky -- it gave them scope to continue growing."
At the forefront of that rapid expansion was Evergrande, built by founder Xu Jiayin in 1996 to have a presence in 280 cities and an empire that includes mineral water, wealth products and even a football team.
Now one of the country's largest developers, it is drowning in liabilities of more than $300 billion as it navigates China's new rules.
All eyes are on how the crisis is handled by Beijing, which has so far remained quiet, with lingering fears over consumer confidence and an already weakening property market.
"What starts off as a problem exclusively for Evergrande today could snowball to take in other relatively weak developers tomorrow," added McMahon.
- 'Sustained decline' -
The three red lines show Beijing's long-intended aim to restructure the property market, analysts say, but Evergrande's staggering debts may force the government's hand to shore up the sector.
Evergrande is the most indebted of China's private homebuilders with overwhelming liabilities and wild diversification.
But there have been at least two bond defaults from major developers this year, with others scrambling to raise cash to drive the merry-go-round of debt, land buying and off-plan sales that move China's property market.
Another payment is due this week on a separate bond after Evergrande appeared to miss a payment last week.
A slowing population has also hit property demand.
"The root of Evergrande's troubles... is that residential property demand in China is entering an era of sustained decline," Capital Economics chief Asia economist Mark Williams said in a note.
Sharp price falls will make it harder for developers -- even those with healthier balance sheets -- to finance construction, he added.
If debt-burdened Evergrande is carefully unpacked most of the risk can be ring-fenced, analysts say, with reports the government is already taking over some stalled projects to restart construction.
"If well-managed, extensive fire sale of properties by Evergrande could be prevented," Tommy Wu of Oxford Economics told AFP.
But if it sparked wider problems, Wu said, the government would likely have to ease the three red lines and engineer a softer landing.
- Weaker sales -
Evergrande aside, the finances of most developers have improved over the past year.
Country Garden -- China's largest homebuilder by sales -- posted positive half-year profits in August as sales in smaller cities surged.
"Last summer, eight of the 12 firms to which the red lines were initially applied breached at least one," Capital Economics said in a research note.
"Now only two do –- Evergrande and (Shanghai-based developer) Greenland."
Property sales and prices have weakened in recent months while Evergrande stole headlines, according to data analytics company China Beige Book.
Some local governments have imposed price floor controls to stop the cost of homes nosediving, said Iris Pang, from ING.
If potential homebuyers are spooked and hold onto their cash, sales will be driven down further.
In that case, policymakers are likely to step in, said Jonas Golterman of Capital Economics, pushing down mortgage rates or reducing deposit requirements for homebuyers.
"Our base case is that the real estate market faces a period of uncertainty and perhaps some price falls, but not an outright crash in house prices," he said.
"That said, the downside risks are significant, and this sort of situation is unpredictable."
