Fitch warns Evergrande default could have broad economic effects in China

HONG KONG, Sept. 15 (Reuters) – Rating agency Fitch said many sectors could be exposed to increased credit risk if No.2 Chinese property developer Evergrande Group (3333.HK) were to default , although the overall impact on the banking sector be manageable.

Evergrande scrambles to raise funds to pay its many lenders and suppliers, as it oscillates between a messy collapse with far-reaching impacts, a managed collapse, or the less likely prospect of a Beijing bailout. Read more

Regulators have warned of broader risks to the country’s financial system if the company’s $ 305 billion in liabilities are not contained.

“We believe a default would increase the credit polarization among home builders and could cause difficulties for some small banks,” Fitch said in a note Tuesday night.

Fitch demoted China Evergrande Group to “CC” from “CCC +” on September 7, indicating that he considered some default likely.

On Tuesday, Evergrande said it had hired advisers to review its financial options and warned of cross-default risks amid plummeting real estate sales and lack of progress on asset disposals. Read more

Fitch said that 572 billion yuan ($ 88.8 billion) of Evergrande’s borrowings was held by banks and other financial institutions, but banks may also have indirect exposure to the developer’s suppliers, who owe 667 billion yuan for goods and services.

“Smaller banks more exposed to Evergrande or other vulnerable developers could face a significant increase in non-performing loans (NPLs), depending on the development of any credit event involving Evergrande,” 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 country’s 4,000 banks would decline only slightly if the NPL ratio for home loans increased by 15 basis points.

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

Its property management unit (6666.HK) and EV unit (0708.HK), however, rebounded by 10.4% and 9.3%, respectively.

In the debt market, Evergrande’s Shanghai bond traded 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 return greater than 500%.

Fitch also said the risk of significant pressure on house prices in the event of a default would be low, and he expects the government to act to protect the interests of households to ensure home deliveries.

On Wednesday, around 40 protesters stood near the entrance to Evergrande’s headquarters in Shenzhen, barred from entering by dozens of security personnel.

It followed chaotic scenes at headquarters two days earlier, as disgruntled investors swarmed its lobby to demand repayment of loans and financial products.

Some videos circulating on Chinese social media have also shown what has been described as Evergrande-related protests elsewhere in China.

($ 1 = 6.4426 yuan Chinese renminbi)

Reporting by Kanishka Singh in Bengaluru and Clare Jim in Hong Kong; Additional reporting by David Kirton in Shenzhen and Andrew Galbraithin in Shanghai; Editing Stephen Coates & Shri Navaratnam

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