China’s property crisis deepened as two major developers faced severe financial difficulties that threaten to send shock waves through the country’s economy and beyond.

The filing from Evergrande, which defaulted in 2021 after a liquidity crisis, came a day after China’s securities regulator notified the company’s Chinese branch that it was being investigated for suspected disclosure violations.

Country Garden is one of the few major homebuilders to have avoided default since Beijing introduced a “three red lines” policy in 2020 that was aimed at reining in the debt levels in the highly leveraged sector.

The red lines set limits on liabilities-to-asset ratios and ensure companies hold cash reserves equivalent to at least 100% of short-term debt.

Dan Wang, the chief economist in China for Hang Seng Bank, said that “to a certain extent” the government’s three red lines policy has been a success in deleveraging the sector.

As confidence in the real estate sector has plummeted, so have home sales, depriving developers of much-needed cash to complete construction works and meet interest payments.

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