SHANGHAI/LONDON, Oct 19 (Reuters) – China’s property sector saw more drama on Tuesday as Evergrande (3333.HK) shelved plans to sell a majority stake in its property services unit, Sinic formally declared default and Kaisa was crunched by another credit rating cut.

Sources told Reuters that Evergrande, teetering on the brink of collapse with more than $300 billion in debt, had been forced to stall its proposed $2.6 billion, 51% stake sale (6666.HK) to smaller rival Hopson Development (0754.HK) after failing to win the blessing of the Guangdong provincial government which is overseeing Evergrande’s restructuring.

When contacted, a Hopson representative asked Reuters to await an announcement. Evergrande and the Guangdong provincial government did not immediately respond to Reuters requests for comment.

Evergrande is scrambling to raise funds to pay its many lenders and suppliers, amid expectations it is about to formally default on one of international bonds.

Hengda Real Estate Group Co, Evergrande’s flagship unit, has though transferred funds to pay an ‘onshore’ bond coupon of 121.8 million yuan ($19 million), sources with knowledge of the matter said.

One said Evergrande, China’s No. 2 developer, needs to prioritise its limited funds towards the domestic market where the stakes are much higher for the country’s financial system.

While, it was not immediately clear why the Guangdong provincial government has not approved the Evergrande Property Services transaction, some of Evergrande’s international creditors had also opposed the deal, the person added.

Another source said the announcement of the deal will be delayed, pending China’s regulatory approval. The deal has already won Hong Kong Stock Exchange’s special approval, he added.

Reuters reported last week Chinese state-owned Yuexiu Property (0123.HK) had pulled out of a proposed $1.7 billion deal to buy Evergrande’s Hong Kong headquarters building over worries about the developer’s dire financial situation.

A source said the company had also received guidance from the municipal government of the southern city of Guangzhou to put the purchase on hold at the end of August. read more

MARKETS ROILED

The liquidity crisis at Evergrande has roiled global markets. High-yield bonds issued by Chinese property developers have been hit especially hard although there have been some signs that markets are beginning to differentiate.

An Evergrande bond due March 23, 2022 will officially be in default if the company does not make good after a 30-day grace period for a missed coupon payment that had been due on Sept. 23.

But the wider offshore bond market has responded positively after assuring comments from China central bank’s and coupon payments by two other major developers.

An index of China high-yield debt (.MERACYC), which is dominated by property developer issuers, has seen spreads tighten from last week’s record levels to around 1,484 points on Tuesday.

Sunac China (1918.HK), which has a $27.14 million payment due Tuesday, has paid its bondholders, a source with direct knowledge of the matter said.

The source was not authorised to speak to media and declined to be identified. A Sunac representative also declined to comment.

Kaisa Group (1638.HK), which was the first Chinese firm to default back in 2015 said on Monday it had paid a coupon due Oct. 16 and it plans to transfer funds for a coupon worth $35.85 million due Oct. 22 on Thursday. read more

Its bonds slumped as much as 13 cents on the dollar, or nearly 25%, on Tuesday, after Moody’s slashed the firm’s credit rating and immediately warned it could be cut again due to default worries.

In the past few days, the People’s Bank of China has said spillover effects on the banking system from Evergrande’s debt problems were controllable and that China’s economy was “doing well”.

Bonds from other Chinese developers gained on Tuesday including Modern Land’s 2022 bonds which bounced over 8% to 40.250 cents on the dollar, Greenland which jumped 6-7 cents and Central China Real Estate’s 2024 bonds which climbed 5% to 44.843 cents.

Smaller developer Sinic Holdings (2103.HK) became the latest to have its rating put in “selective default” by S&P after it defaulted on $246 million in bonds, having warned it was likely to do so last week.

Reporting by Clare Jim in Hong Kong, Samuel Shen in Shanghai, Shanghai newsroom and Beijing newsroom; Editing by Lincoln Feast, Kirsten Donovan and Bernadette Baum

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