Fitch warns that an Evergrande default could have broad economic effects on China By Reuters

© Reuters. FILE PHOTO: People gather to demand repayment of loans and financial products at the Evergrande headquarters in Shenzhen, Guangdong province, China, on September 13, 2021. REUTERS / David Kirton

By Clare Jim

HONG KONG (Reuters) – The Fitch rating agency said numerous sectors could be exposed to higher credit risk if China’s No. 2 real estate developer Evergrande Group defaulted, although the overall impact on the banking sector would be manageable.

Evergrande is struggling to raise funds to pay off its many lenders and suppliers, as it teeters between a messy collapse with far-reaching impacts, a managed collapse, or the less likely prospect of a bailout from Beijing.

Regulators have warned of broader risks to the country’s financial system if the company’s $ 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 in an https: // note Tuesday night.

Fitch downgraded China Evergrande Group’s rating to “CC” from “CCC +” on September 7, indicating that it considered a default of some kind likely.

On Tuesday, Evergrande said it had hired advisers to examine its financial options and warned of cross-default risks amid falling property sales and lack of progress on asset sales.

Fitch said 572 billion yuan ($ 88.8 billion) of Evergrande’s loans 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. yuan for goods and services.

“Smaller banks with greater exposure to Evergrande or other vulnerable developers could face significant increases in NPLs, depending on how any credit event involving Evergrande plays out,” Fitch said.

But the agency added that a recent sensitivity test by the People’s Bank of China showed that the average capital adequacy ratio of the 4,000 banks in the country would only decline modestly if the delinquency ratio for real estate development loans increased by 15 basis points. .

Evergrande’s Hong Kong-listed shares fell as much as 5% to HK $ 2.82 on Wednesday morning, a new low since January 2014.

However, its property management unit and electric vehicle unit rebounded as much as 10.4% and 9.3%, respectively.

In the debt market, Evergrande’s bond traded in Shanghai in July 2022 fell 5.6% to 28.3 yuan, while its dollar bond due March 2022 fell 20% to 27.502 cents, with a yield greater than 500%.

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 to act to protect the interests of households to ensure home deliveries.

On Wednesday, approximately 40 protesters stood near the entrance to the Evergrande headquarters in Shenzhen, who were prevented from entering by dozens of security personnel.

This followed chaotic scenes at headquarters two days earlier, when disgruntled investors swarmed 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 in other parts of China.

($ 1 = 6.4426 renminbi)

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