Beijing is facing “challenging trade-offs” as it seeks to address the crisis surrounding embattled developer China Evergrande Group and the pressure it is placing on the country’s property sector, according to the International Monetary Fund (IMF).
As part of its Global Financial Stability Report released overnight, the IMF said China has the tools in place to contain and manage any potential financial stress associated with the potential collapse of Evergrande, the world’s most indebted property developer.
“The broader the support measures, especially if accompanied by an actual or perceived relaxation of the broader effort to de-lever the financial system over time, the greater the risk of financial fragilities re-emerging in the future,” the IMF said. “Similarly, earlier and clearly communicated intervention would likely minimise the risk of contagion, although at the cost of reinforcing a perception of individual firms being too big to fail.”
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Evergrande, China’s biggest residential home builder by sales last year, is struggling under the weight of US$305 billion in total liabilities following years of expansion beyond its core property businesses and concerns about its ability to repay its massive debt load are roiling financial market globally.
The Shenzhen-based property developer missed three interest payments due Monday on its offshore debt, pushing it closer to default after missing two similar coupon payments on its dollar-denominated debt in September.
A group of bondholders said on Friday that the company had not had a “meaningful dialogue” with them since missing last month’s payments and that they were worried about assets bleeding to other creditors. Subcontractors and suppliers also say they have been struggling for months to get paid, potentially exacerbating the economic effects if the company goes under.
Standard Chartered CEO Bill Winters said that he does not believe Beijing will allow the Evergrande situation to turn into a broader event that threatens the country’s financial system.
“This idea that this was something of a Lehman moment for China, I don’t think frankly that China’s that dumb,” Winters said in an interview with Bloomberg Television on Tuesday.
The pressure on Evergrande and other developers follows China adopting new policy measures designed to tamp down speculative property bubbles. In August last year, the People’s Bank of China adopted new “three red lines” requirements to measure the debt levels of developers and to limit their ability to borrow if they were overleveraged.
Beijing has implemented a swathe of reforms in the past year designed to reduce corporate leverage, as well as to promote “common prosperity”, including clamping down on anticompetitive behaviour and banning private tutoring.
Those policy shifts are likely to lead to more sustainable growth and improved sovereign credit metrics in the next five to 10 years, according to S&P Global Ratings
“Implementing all these changes successfully will require finesse,” S&P Global Ratings credit analyst Kim Eng Tan said in a report on Wednesday. “Amid the fraught external environment and China’s sweeping goals, there is a chance that things may not go as smoothly as they hope.”
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