(Bloomberg) -- Intensifying concern over the impact of a China Evergrande Group default is rippling through the nation's financial markets.
Developers led declines on the Hang Seng China Enterprises Index, with Sunac China Holdings Ltd. sinking 11% and Country Garden Holdings Co. -- the nation's largest developer by sales -- losing 8%. This week alone the two stocks have fallen more than 20%. In Shanghai, bank stocks are suffering their fastest selloff in seven weeks. China's junk dollar bonds fell as much as 3 cents on the dollar on Thursday, according to credit traders. Yields at an 18-month high will make it more difficult for issuers to refinance their debt.
"It's not just the real estate sector -- overall sentiment is quite fragile," Elizabeth Kwik, Aberdeen Standard Investments Asian equities investment manager, said on Bloomberg Television.
The outlook for Evergrande is deteriorating by the day. On Thursday, Evergrande's onshore unit halted trading in all bonds after a domestic rating cut put it among the country's riskiest issuers. S&P Global Ratings also downgraded the developer, saying its liquidity and funding access "are shrinking severely." Earlier this week, Chinese authorities told major lenders that the firm won't be able to meet interest payments on loans due Sept. 20, according to people familiar with the matter. That came after the firm hired advisers for what could be one of the country's largest-ever debt restructurings.
Broader signs of stress in the banking system are less apparent. Interbank lending rates remain near averages, showing sufficient liquidity in money markets. But some banks in China appear to be hoarding yuan at the highest cost in almost four years, a sign they may be preparing for what a Mizuho Financial Group Inc. strategist called a "liquidity squeeze in crisis mode."
Bank loans and other borrowings from firms including trusts accounted for about 81% of Evergrande's 335.5 billion yuan ($52 billion) of interest-bearing debt coming due in 2021. Top lenders include China Minsheng Banking Corp., Agricultural Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. In a statement late Monday, Evergrande said rumors that it will go bankrupt are untrue.
Next week will be a litmus test for the company. The firm is scheduled to make interest payments due Sept. 23 of $83.5 million for a dollar note and 232 million yuan for a local note, Bloomberg-compiled data show.
Softness in the housing market -- which comprises about 28% of China's economy -- is becoming more evident. Data Wednesday showed home sales by value slumped 20% in August from a year earlier, the biggest drop since the onset of the coronavirus early last year. Responding to a question on Evergrande's potential impact on the economy, National Bureau of Statistics spokesman Fu Linghui said some large property enterprises are running into difficulties and the fallout "remains to be seen." Economists have warned that China is squeezing its property market too far in its quest to avoid bubbles.
China's current priorities of promoting common prosperity and deterring excessive risk-taking mean there's unlikely to be any easing of curbs this year, according to Macquarie Group Ltd. The property sector will be a "main growth headwind" for next year, although policy makers may loosen restrictions to defend 5% GDP expansion, Macquarie analysts wrote in a Wednesday note.
The central bank on Wednesday rolled over maturing loans to banks rather than adding more liquidity, a sign that Chinese authorities see no need to inject more support into the financial system.
The Hang Seng China gauge was down 2.1% at the midday break. Evergrande fell as much as 10%. Shares of Guangzhou R&F Properties Co., another junk-rated developer, were on track for the worst loss since 2009 on Thursday. The Shanghai property stock index slid 1.8%.
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