China Evergrande Trade Stops as New Trouble Rolls Property Market

A few weeks ago, China Evergrande, the world’s most debt-laden real estate developer, wrote its next chapter as it tried to resolve financial issues with its creditors. Then came a bad news that tore the pages.

The wealth management division of the firm has employees were detained by the authorities. Two former top executives have reportedly been arrested and its billionaire chairman is under police surveillance. Investors fled, selling their shares, sending the company’s already sluggish stock down more than 40 percent in the past week.

Evergrande’s troubles deepened on Thursday when the company suspended shares of three of its publicly traded companies in Hong Kong without giving reasons.

Later on Thursday, Evergrande confirmed to the Hong Kong stock exchange that its chairman Hui Ka Yan had been “subject to enforcement action” by authorities for suspected “illegal offences”. It added that the shares will not trade “until further notice”.

The company has provided little other information in recent days about developments involving its executives, which have been released by Chinese police and reported in local and foreign news media. Evergrande had said the company was under investigation and could not move forward with a major restructuring of its debt. Investors filled in the blanks.

The fast-moving events have increased pressure on policymakers in Beijing trying to resolve China’s asset crisis. Two years ago, Evergrande’s $300 billion debt collapse put the world on edge. Now the company is back in the spotlight, and its inability to resolve issues with its creditors is casting a pall over China’s real estate landscape, already littered with signs of bankruptcy.

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The uncertainty over the fate of Evergrande, which had nearly 110,000 employees as of July, deepens concerns about dozens of other developers that have defaulted in the past two years. Another major Chinese developer, Country Garden, reported a loss of $7.3 billion in the first half of the year as it struggles to settle its debts to bondholders.

“It raises more questions than it answers,” said Sandra Chow, co-head of Asia-Pacific research at credit analytics firm CreditSites. “In an environment where people are nervous, that doesn’t help. Sentiment was already bad in the property sector.

Chinese real estate stocks have fallen and hit multi-year lows in recent days. Homebuyers are boring. Some foreign investors who have lent money to Chinese developers are losing hope that they will ever get paid.

China’s housing market, once buoyed by borrowing, has suffered over the years since Beijing curbed real estate firms’ ability to borrow more. In 2021, Evergrande was among the first and foremost to default on a tower of unpaid bills. Dozens of other private developers followed, raising fears about China’s wider economy, which has long relied on the housing market for its growth.

China emerged from paralyzing pandemic lockdowns earlier this year, unleashing hope that some developers could move forward, buoyed by new home sales and progress in negotiations with creditors. Traders swapped bonds of defaulting developers, sometimes for cents on the dollar, expecting to make money once the companies serviced their loans.

In recent weeks, Beijing has offered new measures to boost the real estate market, such as lowering mortgage rates. Some of China’s biggest cities have tried to ease restrictions on home buying. But their efforts have done little to change the broader pessimism among Chinese households, which are deeply wary of spending. A major developer, China Oceanwide, faces court-ordered liquidation by impatient foreign creditors. Evergrande said last week it had to reassess its own restructuring proposal because its sales failed to meet expectations, bringing it closer to a possible liquidation.

Along the way, some of the remaining creditors that the developers hoped could pay some of their bills have walked out.

“We see this sector as uninvestable,” said Michael Lowy, chief executive of SC Lowy, an investment firm that once held a small position in Evergrande securities, citing poor information and disclosures.

The woes of Evergrande and other developers have exposed deep problems within China’s financial system, which has long allowed unrestrained borrowing, unchecked expansion and often corruption. Evergrande continues to stand out for poor corporate governance, even as regulators tighten rules and try to compel companies.

When it ran into cash trouble two years ago, Evergrande turned to its own employees, many of whom were empowered to lend through its wealth management division. This month, authorities in the southern Chinese city of Shenzhen said they had detained some employees at its wealth management division.

Evergrande confirmed the detentions without providing any details, adding new mystery to a company that has not particularly cared to inform its investors. The company later called off key meetings to finalize a restructuring plan, blamed poor sales and said it could not issue new debt as part of its restructuring plan because its core business was trading onshore.

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Investors left in the dark by Evergrande have been clinging to media reports in recent days. On Monday, Chinese media reported Kaixin Evergrande’s former chief executive Xia Haijun and former chief financial officer Pan Darong have been detained by authorities. Two former executives resigned from Evergrande last year after they were involved in a scheme to funnel $2 billion from a subsidiary into the coffers of Evergrande’s main holding company.

Then on Wednesday, Bloomberg Evergrande’s founding chairman, Mr. Hui has been picked up by police and is under residential surveillance, according to reports. Mr. Pan and Mr. The agency did not confirm the detention of Xia.

Creditors are further downgraded and an important source of funding for Chinese companies is drying up as talks to repay foreign creditors for companies such as Evergrande have stalled.

“The door is closed for Chinese companies to issue debt abroad,” said Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis.

Private Chinese companies can raise money from foreign investors if they want to expand, Ms Garcia-Herrero said. Most investors are no longer comfortable doing so, he said.

“When they need a market, will it be there? I don’t think so.”

Claire Fu Contributed report.

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