Fitch warns an Evergrande default may have broad China economic effects
HONG KONG (REUTERS) – Rating agency Fitch said that numerous sectors could be exposed to heightened credit risk if China’s No.2 property developer Evergrande Group were to default, although the overall impact on the banking sector would be manageable.
Evergrande is scrambling to raise funds to pay its many lenders and suppliers, as it teeters between a messy meltdown with far-reaching impacts, a managed collapse or the less likely prospect of a bailout by Beijing.
Regulators have warned of broader risks to the country’s financial system if the company’s US$305 billion (S$409.8 billion) of liabilities aren’t contained.
“We believe a default would reinforce credit polarisation among homebuilders and could result in headwinds for some smaller banks,” Fitch said in a note late on Tuesday (Sept 14).
Fitch downgraded China Evergrande Group to “CC” from “CCC+” on Sep. 7, indicating that it viewed a default of some kind as probable.
On Tuesday, Evergrande said it has engaged advisers to examine its financial options and warned of cross-default risks amid plunging property sales and lack of progress in asset disposals.
Fitch said 572 billion yuan (S$119.3 billion) of Evergrande’s borrowings were held by banks and other financial institutions, but banks may also have indirect exposure to the developer’s suppliers, who are owed 667 billion yuan for goods and services.
“Smaller banks with higher exposure to Evergrande or to other vulnerable developers could face significant increases in non-performing loans (NPLs), depending on how any credit event involving Evergrande develops,” Fitch said.
But the agency added a recent People’s Bank of China sensitivity test showed the average capital adequacy ratio of the 4,000 banks in the country would only drop modestly if the NPL ratio for property-development loans were to rise by 15 basis points.
Evergrande’s Hong Kong-listed stock slipped as much as another 5 per cent to HK$2.82 on Wednesday morning, a fresh low since Jan 2014.
Its property management unit and EV unit, however, bounced as much as 10.4 per cent and 9.3 per cent, respectively.
In the debt market, Evergrande’s Shanghai traded July 2022 bond fell 5.6 per cent to 28.3 yuan, while its US dollar bond due March 2022 dropped 20 per cent to 27.502 US cents, yielding more than 500 per cent.
Fitch also said the risk of significant pressure on house prices in the event of a default would be low, and it expected the government would act to protect households’ interests to ensure home deliveries.
On Wednesday, roughly 40 protesters stood near the entrance at Evergrande headquarters in Shenzhen, prevented from going inside by dozens of security personnel.
This followed chaotic scenes at the headquarters two days earlier, as disgruntled investors crowded its lobby to demand repayment of loans and financial products.
Some videos circulating on Chinese social media also showed what were described as Evergrande-related protests elsewhere in China.
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