By Engen Tham

SHANGHAI/BEIJING (Reuters) – As fears of contagion from any default by China Evergrande Group mounted this month, some Chinese banks, insurers, and shadow banks stopped offering new credit to property developers, and ran urgent checks on their exposure to the troubled sector.

China’s second-largest property developer fell short of the due date for an interest payment on Friday, carrying $305 million in debts.

Evergrande’s difficulties will increase pressure on peer developers to get funding. And analysts warn that China’s financial systems could be in serious trouble if these property developers fail to make payments to investors, suppliers, and lenders.

“The market is worried that real estate companies have a high concentration of cashflow problems, which would trigger large-scale bad debt risks in the banking system,” said Wang Yifeng, analyst from Everbright Securities Co.

Bank of China, the country’s fourth largest lender by assets, is monitoring closely all its developer clients, to prevent contagion risks, said a person with knowledge of the matter.

“The expectation is that not only Evergrande, but also some of the top leveraged developers are on edge of liquidity crash even insolvency,” said a person at the Bank of Shanghai Co Ltd.

To calm the market and in an unusual move, Chinese lenders including China Minsheng Bank, China Zheshang Bank and China Everbright (OTC:) Bank have been publicly reassuring and voluntarily disclosing their exposure to Evergrande and the property sector.

However, financial institutions are trying to decrease their exposure to non-quality assets to avoid a drastic deterioration of the financial position of developers.

CREDIT STRESS

Alarmed by what has happened to Evergrande, bankers at one Shanghai branch of China CITIC Bank Corp started scrutinizing loans to developers, reviewing their accounts and repayment terms, said a person with direct knowledge.

CITIC Bank stated that it had enhanced loan loss provisions as well as risk resistance to be prepared for Evergrande’s potential risks.

Evergrande, once China’s most-sold developer, is now considered a seismic bust. A crackdown debt has ended a freewheeling period of borrowing money that was reknowned for creating ghost towns.

Huarong Asset Management Co, which took precautionary measures to tighten Evergrande’s credit rating a few decades ago, has tightened approval procedures for other developers in recent weeks, making it difficult for them raise funds for projects in lower-tier cities.

Fourth-tier cities have been completely eliminated, and third-tier municipalities are extremely difficult to obtain approvals. Huarong officials stated that it is now more difficult than ever to get approvals for third-tier cities.

According to an official from AEON Life in China, the fifth-largest insurance company, AEON Life raised the standards for developers seeking funds. For example, it set a higher interest rate on collateral.

Huarong AMC and AEON Life didn’t immediately reply to Reuters requests for comment.

Scope research stated on Thursday that Chinese insurers, banks and bond funds have given large amounts of funding to the real estate sector over recent years. Their exposure makes them one of the most significant threats facing the financial system.

Data from the People’s Bank of China shows that property loans made up nearly 30% of the total loans outstanding by Chinese financial institutions as of September 2020.

Fitch Ratings said in a report on Friday that many of the smaller mid-tier Chinese banks are expected to face “greater asset-quality headwinds” as the property sector suffers an increase in the credit stresses that were highlighted by Evergrande.