Fitch says possible China Evergrande default may have broader effects

HONG KONG (Reuters) – Rating agency Fitch said that numerous sectors could be exposed to heightened credit risk if China’s No.2 property developer Evergrande Group were to default, although the overall impact on the banking sector would be manageable.

© Reuters/DAVID KIRTON People protest to demand repayment of loans and financial products at the Evergrande’s headquarters, in Shenzhen

“We believe a default would reinforce credit polarisation among homebuilders and could result in headwinds for some smaller banks,” Fitch said in a note https://bit.ly/3CbhKPt late on Tuesday.

Fitch downgraded China Evergrande Group to “CC” from “CCC+” on Sep. 7, indicating that it viewed a default of some kind as probable.

Evergrande has been scrambling to raise funds to pay its many lenders and suppliers, while regulators have warned that its $305 billion of liabilities could spark broader risks to the country’s financial system if not stabilised.

Fitch said 572 billion yuan ($88.8 billion) of Evergrande’s borrowings 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 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.

But the agency added a recent People’s Bank of China sensitivity test showed 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.

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 would act to protect households’ interests to ensure home deliveries.

($1 = 6.4426 Chinese yuan renminbi)

(Reporting by Kanishka Singh in Bengaluru and Clare Jim in Hong Kong; Editing by Christian Schmollinger and Stephen Coates)

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