HONG KONG, Sept 20 (Reuters Breakingviews) - The brushfire underway in China Evergrande’s (3333.HK) balance sheet is spreading to the property market and beyond, and that’s the point. Officials are allowing the troubled developer to teeter on the edge of default but hoping the flames won’t incinerate the wider economy. It’s a big political risk. No industry has so successfully defied the Chinese Communist Party’s calls for financial discipline as real estate. It drives around a quarter of domestic output, and because local governments depend on land sales to fund budgets, it has an inordinate fiscal impact. The last time Beijing tried to cool property prices in 2013 to 2014, it had to back off as economic activity contracted too. The unsuccessful attempt appeared to have emboldened developers, which levered up as much as possible. Evergrande’s debt touched a high of over 6 times its equity in 2016, Refinitiv data show. It still owes around $300 billion today, with $83.5 million in interest due this week. Shares in Hong Kong plunged 17% on Monday on default concerns. President Xi Jinping wants investment to flow into industrial upgrades, not condominiums. But so long as property is seen as risk-free, it will continue to attract an inordinate amount of capital. Households, for instance, borrowed $1.2 trillion in 2020 even as income growth slowed, with most of that in mortgages. The only way to change attitudes is to produce a controlled burn, as foresters do when they set planned fires to consume excess tinder and preserve healthy trees. Things are certainly burning. A Rhodium analysis shows 16% of the offshore dollar bonds issued by Chinese developers are yielding over 30%. Share prices in listed developers have started plunging; even before the latest rout, Evergrande was already down 85% this year. Buyers are holding back; sales volumes in 30 large cities fell 32% year-on-year in the first 11 days of September. Cue pressure on bank balance sheets. Unsurprisingly, perhaps, manufacturing and services activity have lurched into monthly contraction. Xi may be willing to pay a high price to get the pain of correction out of the way and fend off total catastrophe a decade from now. If he blinks, however, and bails out in the name of stability, his push to make housing “for living, not speculation” could go up in flames too. Follow @petesweeneypro on Twitter CONTEXT NEWS - One of China Evergrande Group"s main lenders has made provisions for losses on a portion of its loans to the embattled property developer, while some creditors are planning to give it more time to repay, Reuters reported on Sept. 17, citing four bank executives. Evergrande is due to pay $83.5 million of interest on Sept. 23 for its offshore March 2022 bond. It has another $47.5 million interest payment due on Sept. 29 for March 2024 notes. - China"s new home prices rose at their slowest pace in months in August. Average new home prices in 70 major cities grew 0.2% last month after rising 0.3% in July, according to Reuters calculations based on data released by the National Bureau of Statistics.