LUV Stock – China’s Evergrande headache turns into a migraine
HONG KONG (Reuters Breakingviews) – Deleveraging Evergrande is turning into a real migraine. Chinese watchdogs want lenders to stress-test their exposure to the developer, Bloomberg reports. In focus is troubled Shengjing Bank, but larger institutions are involved too.
Less than a year ago a leaked letter purported to be sent by the company to regulators warned that its debt load posed a systemic risk. While Evergrande denied its veracity, bond traders got upset nevertheless. The company reported owing over $100 billion in interest-bearing loans by March, and has crossed all three of China’s “three red lines” on leverage.
The latest anxiety stems from a report in financial magazine Caixin claiming that officials are looking at founder Hui Ka Yan’s relationship with $8 billion Shengjing Bank, which Evergrande controls via a 36% stake. In May Shengjing, which reported operating profit contracted 90% in 2020, was fined for illegally financing real estate projects. Caixin alleged it loaned up to $20 billion to Evergrande via direct and indirect channels.
The result could be another collapse similar to that at Baoshang Bank, which was turned into a piggy bank by an insurance company and went bankrupt in 2020. The Bloomberg report says officials have ordered Industrial and Commercial Bank of China, the world’s largest by assets, to conduct checks too. Then there are the subsidiaries. Evergrande admits they have defaulted on “small” amounts of trade credit, but its outstanding commercial paper topped a staggering 200 billion yuan ($31 billion) in 2020. Panicked suppliers are now dumping it at as much as a 30% discount, according to local media reports. A $1.3 billion Evergrande bond maturing in June 2023 now yields nearly 20%.
A clumsy crackdown on the developer could damage its ability to repay a wide swathe of financial institutions, which could in turn destabilise the interbank market – precisely what happened with Baoshang. So far there is little clear sign of contagion, and the company’s balance sheet has been propped up by a property market that remains hot despite Beijing’s attempts to cool it. But Hui’s tricks are getting stale. A $43 million share buyback this week did not impress stock or bond investors. With traders already anxious about debt crises at state asset manager Huarong and travel conglomerate HNA, it’s a delicate moment.
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– Authorities led by the Financial Stability and Development Committee have told Evergrande lenders, including Industrial & Commercial Bank of China, to assess the potential hit to their capital and liquidity should Evergrande run into trouble, Bloomberg reported on June 8 citing unnamed sources.
– China Evergrande announced on June 7 that it bought back 29.1 million shares worth a total of HK$336 million ($43 million), according to a Hong Kong Stock Exchange filing. Shares rose as much as 4% to a more than one-week trading high the following day.
– For previous columns by the author, Reuters customers can click on [CHEN/]
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