HONG KONG (Reuters Breakingviews) - China’s most-indebted property developer is scrambling as officials push an aggressive cleanup of the bubble-prone sector. The ongoing pain of $25 billion Evergrande, with businesses spanning theme parks to electric vehicles, is a vivid measure of how far President Xi Jinping will go to reallocate capital and de-risk the economy. Hui Ka Yan founded Evergrande in 1996. He rose from humble beginnings to earn the title as China’s “king of debt” thanks to the credit-fuelled expansion of his property empire. After an attempt to list the company during the global financial crisis failed, Evergrande went public in 2009 in Hong Kong. Hui started trimming the developer’s debt during Xi’s first deleveraging push in 2017 but the company returned to its pursuit of scale as the effort was shelved and domestic liquidity conditions eased. Evergrande sells projects in nearly 300 cities and holds China’s biggest land bank. It had assets of 2.3 trillion yuan ($355 billion) and total interest-bearing debt of 836 billion yuan, roughly $129 billion, as of June. Hui, 62, is the world’s richest property tycoon with a seat on China’s top political advisory body. Evergrande falls foul of leverage ratio targets introduced in August for twelve real estate firms, and now extended to cover the entire sector. These “three red lines” allow a maximum 70% liabilities to assets, cap net debt at 100% of equity, and require developers to hold cash in excess of short-term borrowings. Developers like Evergrande that breach all three are not allowed to raise any interest-bearing debt above June 2019 levels. That poses liquidity risks especially given Evergrande’s high funding costs. The company’s cash as of June only covered half of its short-term debt of 396 billion yuan ($61 billion). Its liquidity buffer is thinner than its closest peers Country Garden, Vanke and Sunac, according to S&P Global. It signals the end of a long real estate gold rush which has made apartments in Beijing pricier than London on an income-adjusted basis. Evergrande’s stock has lost nearly one third of its value since August. S&P has downgraded the company’s ratings outlook to negative, and added that a formal cut can be triggered if debt, currently at over 6 times EBITDA, rises above 8 times. It’s selling apartments at record discounts, offloading commercial properties, liquidating stakes in non-core businesses, and eyeing sectors with strong growth potential. Evergrande’s property sales grew by a robust 20% year-on-year in 2020. In September, Hui convinced most creditors owed some 144 billion yuan, roughly $22 billion, to convert their dues into equity after regulators rejected a proposal to list its onshore real estate unit in Shenzhen. The details of the settlement were scarce. Evergrande listed its property management unit in a $1.8 billion IPO in Hong Kong in December after securing strategic investors including technology titan Tencent. Meanwhile, Evergrande itself tried to raise $1 billion through a share placement in October but pocketed less as investors held back. Hui is eyeing a secondary listing in Shanghai for its $33 billion China Evergrande New Energy Vehicle which has abruptly pivoted its focus from the health sector to automobiles. The subsidiary is yet to start producing cars but aims to make five million each year by 2035. Evergrande could also cut back on land acquisition: the company’s spending in 2020, as estimated by China Index Academy, is equivalent to 274% of its previous year’s net profit. Beijing’s separate crackdown on property loans suggest sales will anyway slow. In a worst case scenario, Evergrande’s land bank could be tapped to recoup investor losses. It had an undeveloped land reserve equivalent to nearly 10% of Germany’s housing stock by floor area in 2018, Shanghai-based consultancy E-house estimated in 2019. But many plots are in less attractive smaller cities flush with inventory. In reality, the company is probably too big to fail. It’s linked to 8,000-plus suppliers, nearly three hundred financial institutions, and three million jobs, according to a letter it wrote to its home Guangdong government in August which leaked online. Although the authenticity of the missive is disputed, it underscores the challenge Beijing faces in reining in the sector. Indeed, Evergrande’s rightsizing will provide a vivid measure of Xi’s commitment to reform.