Numerous sectors of the Chinese economy could be exposed to heightened credit risk if the country’s second-largest property developer, China Evergrande Group (恒大集團), were to default, although the overall effect on the banking sector would be manageable, Fitch Ratings Ltd said in a note on Tuesday.
Evergrande is scrambling to raise funds to pay its many lenders and suppliers, as it teeters between a messy meltdown with far-reaching effects, 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 of liabilities are not contained.
“We believe a default would reinforce credit polarization among homebuilders and could result in headwinds for some smaller banks,” Fitch said.
The rating agency on Tuesday last week downgraded Evergrande to “CC” from “CCC+,” 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 a lack of progress in asset disposals.
Fitch said that 572 billion yuan (US$88.8 billion) of Evergrande’s borrowings were held by banks and other financial institutions, but banks might 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.
However, a recent People’s Bank of China sensitivity test showed that 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, the agency added.
Evergrande’s Hong Kong-listed stock slipped as much as another 5 percent to HK$2.82 yesterday morning, a fresh low since January 2014.
However, its property management and electric vehicle units bounced as much as 10.4 percent and 9.3 percent respectively.
In the debt market, Evergrande’s Shanghai-traded July next year bond fell 5.6 percent to 28.3 yuan, while its US dollar bond due March next year dropped 20 percent to US$0.27502, yielding more than 500 percent.
Fitch also said that the risk of significant pressure on house prices in the event of a default would be low, and it expected that the Chinese government would act to protect households’ interests to ensure home deliveries.
Yesterday, about 40 protesters stood near the entrance of Evergrande’s 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.
Videos circulating on Chinese social media also showed what were described as Evergrande-related protests elsewhere in China.
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