Major Chinese banks have reportedly said Evergrande will not pay interest on loan next week

The China Evergrande Center in Hong Kong on March 26, 2018.Bobby Yip / Reuters

Major Chinese banks have been told by the housing authority that Evergrande Group will not be able to pay loan interest due on September 20, Bloomberg reported, highlighting the growing impact of the property developer’s liquidity crisis. .

The problems that afflict the nation’s no. 2 real estate developers have already sparked social anger among investors and homebuyers and increased the risks for China’s vast financial system.

The Department of Housing and Urban and Rural Development (MOHURD) held a meeting with the banks this week, the Bloomberg report said on Wednesday, citing sources familiar with the matter. He added that Evergrande was still discussing with banks the possibility of extending payments and rolling over some loans.

The indebted real estate developer scrambles to raise funds to pay his many lenders and suppliers, as he oscillates between a messy collapse with far-reaching impacts, a managed collapse, or the less likely prospect of a Beijing bailout.

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

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

The Housing Department did not immediately respond to a request for comment sent by Reuters by fax, nor did Evergrande immediately respond to a request for comment.

Last week, financial intelligence provider REDD reported that Evergrande told two banks it planned to suspend payment of interest owed later this month.

On Wednesday, the S&P rating agency downgraded Evergrande again from “CC” to “CC”, with a negative outlook, citing reduced liquidity and default risks, including the possibility of debt restructuring.

A default by the Evergrande group could expose many sectors to increased credit risk, another rating agency Fitch said in a note Tuesday evening, but added that the overall impact on the banking sector would be manageable.

“We believe that a default would reinforce the credit polarization among home builders and could cause difficulties for some small banks,” Fitch said.

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

Fitch said that 572 billion yuan ($ 88.8 billion) of Evergrande’s borrowings were held by banks and other financial institutions, but the banks could also be indirectly exposed 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 progress of any credit event involving Evergrande,” Fitch said.

But the agency added that a recent sensitivity test by the People’s Bank of China (PBOC) 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.

The PBOC, China’s central bank and the country’s banking supervisor summoned Evergrande executives in August in a rare gesture and warned it must reduce its debt risks and prioritize stability .

DISADVANTAGED INVESTORS

Evergrande’s Hong Kong-listed stock fell another 5.4% to close at HK $ 2.81 on Wednesday, a new low since January 2014, while financial stocks were also weighed down by concerns about risk wider than the Evergrande debt crisis might result. The company’s property management unit and EV unit, however, rebounded 5.5% and 2.6%, respectively.

Three of Evergrande’s onshore exchange-traded bonds fell at least 20%, and one saw its trading halted by the Shenzhen Stock Exchange.

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.

Market watchers have said social stability will be the top priority for the Chinese government.

Oscar Choi, founder and IT director of Oscar and Partners Capital Limited (OP Capital), said the government will talk to creditors on the one hand and use its local resources to prevent unfinished apartments on the other.

“You cannot leave the construction unfinished; a few hundred thousand families (will be affected), ”he said.

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.

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Bernadine J. Perkins