China regulators ordered to conduct stress tests on Evergrande Group

4 minutes
China regulators ordered to conduct stress tests on Evergrande Group

- Chinese regulators have instructed Chinese creditors of China Evergrande Group to conduct a fresh round of stress tests on their exposure to the world's most indebted developers, according to people familiar with the matter.

Authorities led by the Financial Stability and Development Committee, the top financial regulator in China, recently told lenders such as the Industrial Commercial Bank of China Ltd. to assess the possible hit to their capital and liquidity should Evergrande run into trouble, the people asked not to be identified discussing a private matter. It's unclear whether the results in any formal action will lead to official action.

While it's not the first time regulators have required banks to report their Evergrande exposure, the directive suggests that concerns about the company's financial health have become serious enough to reach the upper levels of China’s government once again.

Evergrande shares and bonds have fluctuated in recent weeks amid a drumbeat of negative news, from late payments on short-term debt by some of its affiliates to a media report that authorities are scrutinizing the developer's dealings with a bank in which it does a substantial share.

Evergrande's debt pile is resurfacing about nine months after the last liquidity scare at billionaire Hui Ka Yan's house behemoth, which in September reached a deal with investors to avoid more payments that would have placed a significant strain on the junk-rated company's balance sheet. Evergrande's dollar bonds traded at the end of the year and had received a relatively stable range until they started trailing again at the end of May.

Evergrande denied in a response to questions from Bloomberg that regulators had asked banks to perform stress tests without saying how it knew that was the case. The company announced that its operations are normal, echoing a statement earlier this week. The developer has said that they were compliant in trading with Shengjing Bank Co., the lender in which it owns a stake, and that various rumors, including that it was resorting to extensive price discounts, are false. Evergrande has arranged payment of a'very small amount' of commercial paper issued by some affiliates that had not been refunded on time.

On Wednesday morning in Hong Kong, Evergrande shares fell as much as 3.3%. The stock dropped from a high 58% in July last year. The 10-cent dollar note due 2025 was released on the dollar to 73.9 cents and paring some losses after the day from an eight-month low, Bloomberg compiled prices show.

Evergrande creditors including ICBC and China Minsheng Banking Corp. didn't immediately respond to requests for comment. Nor did the People's Bank of China and the China Banking and Insurance Regulatory Commission.

Evergrande has been a source of angst for Chinese regulators all my life. In 2018 the PBOC brought the company together with HNA Group, Tomorrow Holding Co. and Fosun International Ltd. to the category of businesses that could pose systemic risks to the nation's financial system.

At the end of last year, Evergrande's complicated web of liabilities - including dollar bonds, bank loans and down payments from homebuyers - swelled to 1.95 trillion yuan, about 77% of which was due within 12 months according to its annual report. According to Bloomberg Intelligence analyst Kristy Hung, as much as 81% of Evergrande's debt due in 2021 is in the form of loan payments.

Evergrande alongside Chinese Asset Management Co. is one of the most prolific offshore investors in dollar debt, with more than $20 billion of offshore bonds. Like Huarong, it is also considered a litmus test of the country's willingness to support embattled borrowers as it tries sometimes to balance competing goals of maintaining financial stability and reducing moral hazard.

The recent bout of market volatility surrounding Evergrande intensified at the end of last month after a report from Shengjing Bank that the CBIRC is investigating more than 200 billion yuan of transactions between Evergrande and Caixin Media. The lender owned unspecified amounts of bonds issued by Evergrande, reports WeNews citing large sources.

Investor concerns about Evergrande's access to funding have also increased as the developer has fallen behind peers in meeting the 'three red lines '', even as almost half of the country's 66 major developers met them, up from 14 years earlier, according to data compiled by Bloomberg.

Evergrande said last week that it would try to meet at least one of the red lines by the end of this month.

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