Beijing’s pressure on the real-estate sector is being felt far beyond China Evergrande Group, raising questions about how much economic pain China’s leaders are willing to stomach as they rein in yet another industry.

The turmoil at Evergrande, which spans street protests as well as collapsing prices for its stock and bonds, is the most visible sign of the worsening climate for Chinese property developers. Credit markets are also pricing in significant default risks for some smaller rivals, such as Fantasia Holdings Group Co. and Guangzhou R&F Properties Co.

But economic data for August, released Wednesday, pointed to broader difficulties, with national home sales by value tumbling 19.7% year-over-year, the largest drop since April 2020. Growth in home prices and real-estate investment has slowed, while construction starts fell 3.2% in January-August, compared to a year earlier. Chinese property stocks fell Wednesday, with the Lippo Select HK & Mainland Property Index dropping 3.3% in Hong Kong.

Policy tightening is the immediate problem for Chinese developers, but the underlying issue is that they have borrowed too much over the last decade to expand, said Mark Williams, chief Asia economist at London-based research house Capital Economics.

Performance review bad loans are rising in China’s real-estate sector, although the problem was far worse in the late 2000s. Nonperforming loan ratiosSource: JefferiesNote: Based on filings of Chinese national banks
Loans to property companiesOverall2007’10’15’2002.55.07.5%

“Regulators are trying to deal with the amount of leverage among developers, and there is no pain-free way to do that,” said Mr. Williams. Authorities have to tread a narrow path to enforce deleveraging while keeping the financial system stable, he added. “If they push too hard, then it can become destabilizing,” he said.

The property clampdown could prove to be “China’s Volcker moment,” Nomura chief China economist Ting Lu wrote in a late August report—in a reference to the recession-inducing interest-rate increases that Paul Volcker oversaw as chairman of the Federal Reserve, which he introduced to crush inflation in the early 1980s.

In China’s case, Mr. Lu said Beijing seemed willing to sacrifice some growth stability to achieve its long-term goals, including lowering inequalityraising the birthrate, and cutting its dependence on foreign technology.

“Markets should be prepared for what could be a much worse-than-expected growth slowdown, more loan and bond defaults, and potential stock market turmoil,” Mr. Lu wrote, saying that property makes up a quarter of the Chinese economy.

Worried about a housing bubble, China’s government has repeated the mantra that “homes are for living in, not for speculation,” for almost half a decade, but pressure on real-estate developers has intensified in roughly the last year.