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

Evergrande, the poster child for the woes of China’s property sector, filed for chapter 15 bankruptcy protection in New York on Thursday. The provision permits the company to protect its US assets and will allow cross-border bankruptcy proceedings as it undergoes a restructuring.

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. It is the world’s most indebted property developer, with more than $300bn (£236bn) in liabilities.

Country Garden, which was once China’s largest property developer by revenue, also faces a risk of default in the coming weeks.

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.

Since then, companies responsible for about 40% of Chinese home sales have defaulted. Country Garden, which missed two dollar bond payments last week, has until early September, when the grace period on those payments expires, to quell fears that it is about to tumble into the same fate.

The turmoil in China’s property sector has left suppliers unpaid and homebuyers, who have often made hefty downpayments, without their apartments. Buyers in hundreds of cities have staged mortgage boycotts in protest at the unfinished developments.

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. “But it is too drastic a change in a very short period of time … it created a downward spiral in the liquidity situation for property companies.”

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. New home sales for the top 100 property developers declined by 33% in July, compared with 2022, according to S&P Global Ratings, a ratings agency. Country Garden’s sales were down by 60%.

Country Garden’s liabilities total 1.4tn yuan (£151.1bn), about 60% the size of Evergrande’s. But Country Garden has nearly four times as many housing projects in China, leading to fears of social unrest if construction halts. There have already been reports of small demonstrations outside the company’s headquarters in Guangdong.

The company has promised to deliver 700,000 units this year, but in the first six months it completed less than half that number. The industry is in an “unprecedented difficult period”, the company said in a filing last week.

China is the world’s biggest property market and there are fears financial difficulties could spread to other parts of the economy and to overseas bondholders. BlackRock held $351.9m of Country Garden dollar bonds as of 11 August, according to Bloomberg.

China’s post-Covid economic recovery has been flagging across many sectors, with youth unemployment at a record high and weak retail sales. This week the People’s Bank of China cut rates by 15 basis points to 2.5%, the steepest reduction in three years. The economy has fallen into deflation for the first time in two years.

But Beijing has so far refrained from any significant stimulus plan, and analysts say that tinkering with rates will not be enough to boost consumer demand and confidence.

The turmoil comes as the central bank is also trying to arrest a decline in the value of China’s currency. State banks have reportedly been buying up yuan to slow the currency’s devaluation, and on Friday the bank set the midpoint for daily trading of the yuan at 7.2006 to the dollar, a higher valuation than analysts’ estimates.

China’s securities regulator also announced measures on Friday to boost confidence in the country’s stock markets. The securities commission said it was considering extending trading hours and cutting transactions fees for brokers. The Shanghai and Shenzhen stock exchanges said they would cut equity transaction fees by a third.

Chinese stocks continued to tumble – the Shanghai composite index has fallen by 2% in the past month – while the Shenzhen component index has dropped by more than 4%. Stocks in Hong Kong entered a bear market on Friday, down 21% on their peak near the start of the year.