The mysterious refusal of a Chinese property developer to pay back a lender ought to put the whole debt-investing neighbourhood on watch.

Kaisa owes HSBC some HK$400 million ($52 million), which the bank called in after the departure of Chairman Kwok Ying Shing tripped a covenant in the loan. What’s peculiar is that the company’s finances don’t look too strained. Kaisa had 11.1 billion yuan ($1.78 billion) of cash and bank deposits at the end of June. While housing sales have plunged nationally, larger developers have held up relatively well. Kaisa’s contracted sales by value increased by 29 percent year on year in the eleven months to November.

The failure to pay up may be a negotiating tactic. HSBC has the right to demand payment, but little reason to push an otherwise solvent client into bankruptcy. The bank is the biggest underwriter of yuan-denominated bonds issued in Hong Kong, where Kaisa is listed, with a 25 percent market share in the first three quarters of 2014. Poking a hole in investors’ confidence in the market for offshore Chinese debt would hardly serve its own interests. The drama is therefore likely to be resolved behind closed doors.

But there is a wider sense that the property market is facing difficulties not easily visible to outsiders. Kaisa has parted company with six directors, including the chairman’s brother and a finance director, in less than a year. Local authorities in Shenzhen have blocked it from selling some of its projects, but not said why. As China gets tougher on graft, the deeply politicised property sector will face increasing scrutiny. Rival Agile Property saw its chairman briefly put under house arrest in October.

For a sector so dependent on foreign capital markets, Kaisa’s behaviour doesn’t look rational. Investors are left to weigh up unattractive possibilities – that things are worse than they look from the outside, or that pleasing foreign creditors just isn’t terribly important. Such mysteries only make the investment case for Chinese property developers look shakier.

Context News

Kaisa Group said on Jan. 1 it had failed to repay a HK$400 million ($51.6 million) loan to lender HSBC that came due after the Chinese developer’s chairman resigned, triggering a default. The company warned that the result could be cross-default of other outstanding securities.

Kaisa announced the departure of Chairman Kwok Ying Shing on Dec. 10. Other directors who resigned in 2014 include his brother and vice chairman, Kwok Ying Chi, finance director Cheung Hung Kwong, two more vice chairmen and an independent director.

The company had 11.1 billion yuan ($1.8 billion) of cash and bank deposits at the end of June, and total borrowings of 29.8 billion yuan, of which just under half was bank loans. Kaisa reported negative operating cash flow of 9.7 billion yuan in the first half of 2014.

Kaisa said on Dec. 4 that local regulators had blocked it from selling properties in three of its Shenzhen projects, but did not know why.