China’s Evergrande headache turns into a migraine

Shengjing Bank Co

09/06/2021 03:42

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
    HONG KONG, June 9 (Reuters Breakingviews) - Deleveraging
Evergrande  3333.HK  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  2066.HK , 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  601398.SS   1398.HK , 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.  
    Follow @ywchen1 https://twitter.com/ywchen1 on Twitter
    
    CONTEXT NEWS
    - 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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Bloomberg story    https://www.bloomberg.com/news/articles/2021-06-08/china-tells-banks-to-stress-test-their-evergrande-exposure
Evergrande share buyback announcement    https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0607/2021060701273.pdf
China Evergrande says it is arranging payment for unpaid
commercial paper     urn:newsml:reuters.com:*:nL2N2NP0CB
BREAKINGVIEWS-Breakdown: Evergrande’s rejig offers measure of Xi
    urn:newsml:reuters.com:*:nL1N2JM0CS
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
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 | Editing by Pete Sweeney and Katrina Hamlin)
 ((yawen.chen@thomsonreuters.com; Reuters Messaging:
yawen.chen.thomsonreuters.com@reuters.net))