What’s new: Chinese financial institutions’ potential direct loss from the fallout of China Evergrande Group is manageable, though it could trigger a significant and industrywide deterioration in property developers’ access to funding and property sales, the global credit rating firm Moody’s Investors Service said in a report.
Lenders have already curtailed direct exposures to Evergrande over the past two years, Moody’s said. The developer’s borrowings from banks and trust companies declined to 393.9 billion yuan ($61.2 billion) as of the end of June 2021 from 604.7 billion yuan at the end of 2019, according to the report.
These amounts are low relative to the system's total banking assets of 336 trillion yuan and trust companies’ assets under management of 20.6 trillion yuan at the end of June, Moody’s said.
Large banks’ exposure to Evergrande account for only a small proportion of their loan portfolios. However, the impact on some regional banks and trust companies will be larger because of their higher concentration on Evergrande, Moody’s said.
Even so, the wider Evergrande fallout could weaken Chinese financial institutions' overall credit strength if it leads to a broad deterioration in the property sector, Moody’s said. At the end of June, Chinese banks’ aggregate loans to property developers amounted to 14.2 trillion yuan, or 7.4% of total loans, and mortgage loans totaled 36.6 trillion, or 19.1%.
The background: Evergrande engaged financial advisers to explore “all feasible solutions” to its cash crunch, warning that there’s no guarantee the company will be able to cover the nearly 2 trillion yuan of liabilities on its books.
Fears that the liquidity crisis at Evergrande will shut off funding access in the sector have intensified after defaults and missed payments by other developers.
Missed payments by real estate companies made up 36% of the record 175 billion yuan ($27.1 billion) of onshore corporate bond defaults this year, Bloomberg-compiled data show.
Meanwhile, China’s residential property slowdown is deepening. In August, China’s home sales by value slumped 20%, the biggest drop since the onset of the pandemic at the start of 2020, according to Bloomberg.
Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)
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