Chinese government unlikely to bailout Evergrande
07:57, 21 September 2021
Despite S&P Global warning that an Evergrande default is looming the ratings agency says a government bailout is unlikely as the firm does not pose a systemic risk to China's economy.
Today S&P said the troubled property developer is "on the brink of defaulting" with the first set of repayment due 23 September but argued that because government is already in the middle of bailout to China Huarong Asset Management, a second bailout is unlikely.
“We do not expect the government to provide any direct support to Evergrande and have therefore not factored this into our analysis. It is a privately owned company in a highly commercialised sector. We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy. Evergrande failing alone would unlikely result in such a scenario,” S&P analysts wrote in a report sent to its clients on Tuesday (21 September).
Global impact grows
This view was echoed by Jonas Goltermann, senior markets economist at Capital Economics, who said that policymakers in China will only “step in and provide support” to the wider economy and avoid a sharp slowdown or financial turmoil.
Goltermann wrote in a note that fears of the Evergrande crisis being China’s Lehman moment will “prove undone”, although he admitted that the impact of the Evergrande crisis in other parts of the world is growing.
“The struggles of Evergrande and other developers are in large part the result of tightening restrictions as the authorities try to curtail some of the past excesses in the property sector. That suggests to us that while both equity and bond holders probably face further pain, the authorities will ensure that households exposed to Evergrande (and other struggling developers) are made whole, limiting the wider economic damage,” he wrote.
Evergrande a “buying opportunity”
Analysts at Jefferies also do not see a significant impact on Chinese banks from Evergrande’s difficulties. “Some banks have already set aside provisions on Evergrande exposure.
Major China banks have been using a 'white list’ only including the top 30-50 developers since 2015, preferring state-owned enterprises given lower leverage and better solvency,” Jefferies’ analysts wrote in a note.
The brokerage house added that it is “too early to expect a massive house price collapse”, which could trigger a financial systemic crisis. Jefferies, in fact, told clients that it sees the Evergrande crisis as an opportunity to buy shares in Chinese banks and even added Postal Savings Bank of China to its top picks.
Evergrande is a complex corporate
According to Iris Pang, chief economist for Greater China at ING, if there is a government-led restructure of Evergrande, it will be long “drawn out” process. “Evergrande is not a simple corporate.
The complexities include a bank located in Shandong, under a subsidiary of Evergrande. China's authorities will need to look at how this bank is related to other financial institutions to avoid a liquidity crunch in Shandong and among smaller banks,” Pang wrote in a note.
She added the main aim of any government-led restructuring of Evergrande will be to provide it with enough capital to complete the construction of its residential projects.
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