Fitch warns that an Evergrande defect could have far-reaching economic effects in China

HONG KONG, Sept 15 (Reuters) – Fitch rating agency said many sectors could be exposed to increased credit risk if China’s No. 2 real estate developer, Evergrande Group (3333.HK), defaults. although the overall impact on the banking sector will be manageable.

Evergrande is struggling to raise funds to pay its many lenders and suppliers as it moves between a messy mess with powerful impacts, a managed collapse or the less likely prospect of a bailout by Beijing. Read more

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

“We believe a default would bolster credit polarization among home builders and could cause headwinds for some smaller banks,” Fitch said in a note Tuesday.

Fitch downgraded Chinese group Evergrande to “CC” from “CCC +” on Sept. 7, indicating it considered a defect of some sort likely.

On Tuesday, Evergrande said it hired advisers to examine its financial options and warned of rising delinquency risks amid falling property sales and a lack of progress on asset disposals. Read more

Fitch said 572 billion yuan ($ 88.8 billion) of Evergrande’s loans were in the hands of banks and other financial institutions, but banks may also have indirect exposure to the developer’s suppliers, to whom 667,000 are owed. million yuan for goods and services.

“Smaller banks with higher exposure to Evergrande or other vulnerable developers could face significant increases in delinquent lending (NPL), depending on how any credit event involving Evergrande develops,” 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 only drop modestly if the delinquency ratio of loans for real estate development increased. basic points.

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

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

In the debt market, Evergrande Shanghai bonds traded in July 2022 fell 5.6% to 28.3 yuan, while dollar-denominated bonds matured in March 2022 fell 20% to at 27,502 cents, with a yield of more than 500%.

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

On Wednesday, about 40 protesters stood near the entrance to the Evergrande headquarters in Shenzhen, preventing dozens of security personnel from entering.

This followed chaotic scenes at headquarters two days earlier, as disgruntled investors gathered in their lobby to demand the return of loans and financial products.

Some videos circulating on Chinese social media also showed what was described as Evergrande-related protests elsewhere in China.

(1 $ = 6.4426 yuan to Chinese renminbi)

Reports of Kanishka Singh in Bengaluru and Clare Jim in Hong Kong; Additional reports by David Kirton in Shenzhen and Andrew Galbraithin in Shanghai; Edited by Stephen Coates and Shri Navaratnam

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