Concerns around China Evergrande and its mountain of debt and the likely spillover to other parts of the market are “not going to go away soon”, say banking analysts at JPMorgan.
The Chinese property developer, which had around US$186bn of total debt, circa US$88bn of interest bearing liabilities and circa US$62bn of bank borrowing at the end of June, is only expected to have “limited” direct exposure for European bank investors.
Looking at the broader property developer market in China, JPMorgan’s local economists view the Evergrande problem as “not an idiosyncratic event, but an industry-wide problem for developers”.
There could potentially be 11 defaults across the China high-yield property sector, totaling US$30bn for this year, at a 23% default rate for the sector, according to the team.
While there are US$1.9trn of property developer loans in the system and Chinese banks have around US$2.2trn of on- and off-balance sheet exposure to the property sector, research by JPM expects government intervention to limit the spillover effect; “hence, it is unlikely to pose a systemic threat to the banking sector”.
Overall, the direct and spillover risks of a fallout from Evergrande are seen as “manageable” for the European banking sector.
China banks have made around US$0.8trn of loan loss provisions as of June, so their loss-absorbing ability is “high”, JPM said.
The analysts see it as “unlikely” that there will be a Minsky moment, referring to a market collapse brought on by the reckless speculative activity, named after economist Hyman Minsky.