China Faces Tough Trade-off in Dealing With Evergrande, IMF Says

(Bloomberg) -- China faces tough trade-offs in dealing with the fallout from the financial troubles at property developer China Evergrande Group, the International Monetary Fund said.

On the one hand, the country risks being seen as backing off from its economic deleveraging drive if it provides too much support to Evergrande and other affected companies, the Washington-based lender said Tuesday in its semi-annual Financial Stability Report. On the other hand, it could spur more stress if it puts off arranging backing for the financial system.

“While the authorities have the tools to step in if the situation were to escalate, there is a risk that broader financial stress may emerge, with implications for both the Chinese economy and financial sector as well as global capital markets at the extreme,” the IMF said.

Evergrande’s debt crisis has roiled financial markets and threatens to worsen a property-market slump already underway following government restrictions to rein in the industry. Central bank Governor Yi Gang recently chaired a meeting with officials and bank executives, urging financial institutions to help stabilize the real estate market and support home buyers.

China has become more financially vulnerable during the pandemic as credit conditions have tightened amid rising debt, the Fund said. Risks “remain elevated across various sectors, including nonfinancial firms, households, banks, and asset managers,” it said.

The lending agency warned of “adverse macro-financial feedback loops” in which constrained access to credit leads to slower economic growth, in turn limiting the ability of provincial governments to help troubled firms.

“The potential for macro-financial feedback loops in an environment of slowing credit growth highlights the urgency of comprehensive restructuring and reform efforts,” the IMF said.

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