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China stepped in to buy a stake in a struggling regional bank from China Evergrande Group as it seeks to limit contagion in the financial sector from the embattled property developer.

Evergrande agreed to sell a 20% stake in Shengjing Bank Co. to the local Shenyang government for 10 billion yuan ($1.55 billion), with the bank demanding that all proceeds go to settle debts with the lender, according to a statement to the Hong Kong stock exchange. In that case, the sale would do little to help Evergrande pay its massive debts to bond holders and homebuyers.

The sale illustrates how authorities are taking steps to minimize fallout to the banking system from the worsening liquidity crisis at Evergrande as they try to avoid a bailout. At least 10 lenders told investors earlier this month that they have sufficient collateral for loans to the developer and that risks are under control. Hong Kong’s central bank asked lenders to report their exposure to Evergrande Group, according to people familiar with the matter.

"Maintaining social and financial sector stability is still the overarching policy objective of the Chinese government,” said Nicholas Zhu, a senior analyst at Moody’s Investors Service. "Authorities, including local governments, will take policy measures and assume coordination roles to ensure that the resolution of Evergrande does not cause social or financial instability.”

The real estate conglomerate will sell about 1.75 billion non-publicly traded domestic shares in Shengjing Bank to Shenyang Shengjing Finance Investment Group Co. at 5.7 yuan apiece, according to the statement. Evergrande’s stake in the lender will drop to 14.57% after the latest transaction, which requires relevant approvals. Evergrande raised about 1 billion yuan from a previous stake sale of Shengjing Bank in August.

The bank stake transaction underscores the mounting pressure on billionaire Hui Ka Yan to spin off and sell assets to pay down a mountain of debt. Evergrande’s original 36% stake in Shengjing Bank was among its most valuable financial assets, worth about $2.8 billion. That holding became less appealing as regulators toughened oversight on dealings such as preferential lending and bond purchases between banks and their largest shareholders.

In a sign of the worsening outlook for Evergrande, Fitch Ratings downgraded the developer’s rating to C from CC on Wednesday.

Shengjing Bank posted a more-than 60% drop in first-half profit due to a decline in net interest income and higher impairment losses on assets.

"The company’s liquidity issue has adversely affected Shengjing Bank in a material way,” Evergrande said in the statement, adding that the introduction of the purchaser will help to stabilize the bank’s operations.

A report in May from Caixin Media’s WeNews said the China Banking and Insurance Regulatory Commission was examining more than 100 billion yuan of transactions between the two. Evergrande boosted its stake in Shengjing Bank in 2019, following a request from authorities who wanted to recapitalize the lender, Bloomberg reported last year.

Evergrande is facing mounting pressure to repay its debts. The firm has already fallen behind on its payments to banks, suppliers and holders of onshore investment products. It’s made no public statements on an $83.5 million coupon that was due Sept. 23 and at least several holders had said they hadn’t received the funds. The company needed to pay a $45.2 million coupon on Wednesday for a dollar bond, Bloomberg-compiled data show.

"With so many upcoming coupon payments towards year-end, selling non-core assets is the most efficient way for Evergrande to raise funds,” said Steven Leung, executive director of UOB Kay Hian. The central government is "watching very closely” on the proceeds from asset sales, he said.

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