NEW YORK (Bloomberg) - Kaisa Group Holdings Ltd. captivated Wall Street by minting fortunes from troubled real estate in China.

Now the developer is in trouble itself - and the question is how far the pain will spread.

On Monday, the news came that many had been dreading for months: The company, caught up in an anti-corruption probe, is buckling under its debts as a slumping real estate market drags down the entire Chinese economy. After missing US$52 million in interest payments, Kaisa, once a stock market darling, now confronts an uncertain future.

It's a remarkable comedown for a company that burst onto the scene in 2007 as billions poured into Chinese real estate. Its troubles, long in coming, have set investors on edge and have many asking if Kaisa is a one-off or the start of something worse. Just last week, Standard & Poor's warned that "more defaults cannot be ruled out," saying it's concerned about how profitability in the Chinese property sector is faltering.

"More than one big developer is going to go under," said Erik Gordon, a professor at the University of Michigan who examines legal issues in corporate and sovereign debt restructuring efforts. "Busts follow booms. There's no reason for it to be any different in China."

While there was no immediate reaction in Chinese markets to the default Monday, the saga has sparked jitters among the country's corporate bond investors on multiple occasions over the past several months.

48% Plunge

So while China's equity market has been booming - the result of optimism that government stimulus efforts will shore up the economy - high-yield corporate bonds have posted almost no gains since the end of November, having sold off in January before rebounding in recent weeks.

Kaisa's benchmark dollar bonds, meanwhile, are hovering at prices that show investors anticipate the company will saddle them with losses of more than 40 per cent when a restructuring offer is made. Its stock has been suspended in Hong Kong since March 31 after sinking 48 pe rcent in four months.

The default, the first ever by a Chinese developer on dollar bonds, is in part emblematic of the slowdown in China's property market. The real-estate market is helping drag down the economic expansion to its slowest pace since 1990 after serving as a key engine of outsized growth rates over the past five years. The average home price has fallen 6.1 per cent in the past year, the steepest decline on record, according to the National Bureau of Statistics.

Corruption Crackdown

It's not just a real-estate problem, though. Companies in other industries have found themselves in trouble too. Coking- coal importer Winsway Enterprises Holdings Ltd., for instance, missed a bond interest payment this month and water-treatment company Sound Global Ltd. flagged potential audit issues.

For Kaisa, and its 50-year-old founder Kwok Ying Shing, the government's crackdown on corruption also became a major problem. The developer's woes started late last year when government officials blocked the approval of its property sales and new projects in its home city of Shenzhen, a move that is said to be linked to an investigation of the city's former security chief Jiang Zunyu.

Kwok unexpectedly returned to the company last week after departing three and a half months ago, citing health reasons. In the interim, rival Sunac China Holdings Ltd. agreed to buy a controlling 49 per cent stake from the Kwok family on Jan. 30, subject to a debt restructuring that would be worked out with investors.

Debt Levels

The anti-corruption push by Chinese President Xi Jinping is a hard thing for investors to assess as they try to decipher which companies will hold up amid the slowdown and which will falter, said Shamaila Khan, a portfolio manager at AllianceBernstein LP, which oversees $476 billion.

"This is a factor that we think about very carefully when looking at Chinese companies," Khan said. She said she's anticipating more defaults in the real-estate sector and is staying away from those companies that have the highest debt levels. "This is a sector that grew a lot, quite aggressively. I don't think anyone really expected Kaisa at the end of last year. Credit selection should play a greater role."