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MNI: Chinese Lenders Face Shadow Bank Fallout From Evergrande

MNI (London)
SINGAPORE (MNI)

Chinese banks are set to take a hit from Evergrande's off-balance sheet liabilities.

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Chinese banks' direct credit exposure to struggling property group Evergrande is limited, but regulators are trying to determine the extent of possible losses from loans made to the company's web of shadow banking vehicles, policy advisors said.

These vehicles, including trust funds, were largely funded by complicated funding products unbacked by collateral, and used to provide cash for projects and company operations which are now stalled. While the sum of Evergrande's shadow debts through trust funds to Chinese banks is probably lower than that of the about CNY400 billion in direct loans made to the company, the lack of collateral means that the potential losses will be proportionately greater, said an advisor, asking to remain anonymous.

The spillover effect from Evergrande's woes and Beijing's crackdown on property market leverage will also mean that collateral presented against loans to the company has also lost value, likely adding further to banks' write-downs, the advisor noted.

"Considering the loans are separately held by about 30 banks, they could handle losses via their provisions. What is more of a worry is the debt raised through trust funds," he said.

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While the company has not defaulted, concerns began to build as far back as June, when it failed to pay suppliers from funds raised by short-term vehicles.

In a letter supposedly sent by Evergrande to the government last year, which was widely circulated on the internet, the company appeared to say that its liabilities involved more than 128 banks and over 121 non-bank institutions, mostly trust funds. The letter, whose authenticity was denied by the company, identified Minsheng Bank as its largest creditor, with loans totalling CNY29.3 billion as of June 2020, and outlined commercial links to 8,441 enterprises, including suppliers.

In addition to the CNY571 billion in interest-bearing debts cited in Evergrande's semi-annual report, the company owes about CNY670 billion in short-term commercial paper and accounts payable, advisors said.

While banks do not have significant direct exposure to Evergrande's commercial paper, missed payments on these securities could cause liquidity squeezes throughout the building and property industries, potentially making it more difficult for other companies to meet their own bank loans, said Dong Ximiao, chief analyst at Merchants Union Consumer Finance.

Banks may also have to bear some limited losses from their own proprietary investment in Evergrande financial products, Dong added. They should not be liable on the other hand for losses by investors to whom banks have sold wealth management products including Evergrande shares and bonds, he added.

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While over 30% of loans made by Chinese banks are related to the property market, lenders have been trying to limit their exposure to the sector since 2016, when authorities launched a campaign against rising leverage , noted another advisor.

Banks may soon be asked by the authorities to extend maturities on loans to Evergrande, Dong said, but advisors stressed that financial institutions will be reluctant to go further and participate in any restructuring, given the size of the company's debts and their lack of industry experience.

Any restructuring will hinge on agreeing on prices for assets in a slower economy still affected by a lingering pandemic, said Yan Yuejin, director of E-house China Research and Development Institution.

Evergrande's non-real estate activities may be divested while its core business -may be retained amid a restructuring, Yan said.

While investor appetite for the company's assets may be scanty, its electric vehicle unit may still be attractive to some, including state-owned automakers, the first advisor said.