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Evergrande contagion may be nearing its peak

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A traffic light is seen near the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021. REUTERS/Aly Song/File Photo

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HONG KONG, Oct 18 (Reuters Breakingviews) - China Evergrande (3333.HK) boss Hui Ka Yan has just had yet another of his bubbles burst. Last year he suggested in a leaked letter that his property-developing empire was too big to fail. On Friday, though, the country’s central bank decided the beleaguered company is a bad apple in an otherwise "healthy" industry. That’s too generous, but the regulator is right that the chance of a domestic systemic financial crisis is falling.

The message read more from Zou Lan, a senior official at the People's Bank of China is clear for investors: The government is keeping its hands off. Despite urging faster asset disposal to deliver unfinished apartments , Zou defined Evergrande's mistakes as purely operational and dismissed Hui's creditors as "relatively dispersed". That probably came as the result of stress tests that the central bank has been quietly conducting with banks and other financial institutions.

Evergrande will, though, cause more pain. Hui is already struggling to offload office buildings read more and other assets without a big haircut. And defaults have started to snowball across the industry. On Friday China Properties joined a dozen others that have defaulted on over 47 billion yuan ($7.3 billion) of bonds this year, per an estimate from CRIC, a Chinese property consultancy. S&P Global last week downgraded two of the bigger players, Greenland (600606.SS) and E-house Enterprise (2048.HK).

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But for more sanguine players like Longfor (0960.HK), which remains clear of the debt red lines but whose stock has fallen 24% this year, the risk of becoming collateral damage is much lower. Overly tightened credit policies will probably be corrected on the margin, too, as Zou criticised some lenders for misunderstanding the central bank’s debt control policies.

Smaller, more vulnerable developers remain the weak link. The analogy Zou drew to the shock default of Yongcheng Coal last year and interbank market panic following the Baoshang Bank takeover in 2019 suggests Beijing is willing to stomach some pain for proper deterrence. Chinese property firms have 1.28 trillion yuan of debt due this year, and total bond issuance was 21% lower in the first eight months of the year, according to Beike Research Institute. The relative resilience of the majority of the industry, though, suggests the light at the end of the tunnel is drawing nearer.

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CONTEXT NEWS

- China Evergrande’s problems are isolated and not representative of the country’s broader real estate industry, Zou Lan, head of financial markets at the People's Bank of China, said at a briefing on Oct. 15. Most companies in the sector are operating steadily and have good financials, he argued. Zou also said that the risk of Evergrande’s debt problems spilling over to the financial sector is controllable, as its financial liabilities are less than one-third of total liabilities and each of its many creditors’ exposure is limited.

- “Relevant departments” and local governments are carrying out “de-risking” work at Evergrande based on market-driven principles in accordance with the law, urging it to step up asset disposal efforts, restart project constructions, and safeguard the legitimate rights and interests of home buyers, Zou said.

- Some lenders have had “misunderstandings" about the central bank’s debt control policies, causing financial strains for some developers, Zou said.

- Chinese state-owned property developer Yuexiu has pulled out of a proposed $1.7 billion deal to buy Evergrande’s Hong Kong headquarters over worries that Evergrande's unresolved indebtedness would create complications in completing the transaction smoothly, Reuters reported on Oct. 15 citing sources.

($1 = 6.4364 Chinese yuan renminbi)

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Editing by Antony Currie and Katrina Hamlin

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