China Evergrande suspends operations as new problems roil real estate market | ET REALITY


Just a few weeks ago, China Evergrande, the world’s most indebted real estate developer, was writing its next chapter and working to resolve financial disputes with its creditors. Then came an avalanche of bad news and the pages were torn.

Staff in the company’s wealth management division have been arrested by the authorities. Two former top executives are reportedly detained and its billionaire president is under police surveillance. Investors fled, selling their shares and causing the company’s already depressed shares to fall more than 40 percent over the past week.

Evergrande’s problems deepened on Thursday when the company suspended trading in shares of its three listed companies in Hong Kong without giving any reason.

Later on Thursday, Evergrande confirmed in a filing with the Hong Kong Stock Exchange that its president, Hui Ka Yan, had been “subject to mandatory measures” by authorities on suspicion of “illegal crimes.” He added that the shares would not be trading “until further notice.”

The company has provided little information in recent days about events involving its executives, which had been revealed by Chinese police and reported in local and foreign media. Evergrande said only that the company was under investigation and would not be able to move forward with a critical restructuring of its debt. Investors were left filling in the blanks.

The rapid developments have added to growing pressure on policymakers in Beijing trying to address China’s housing crisis. Two years ago, the collapse of Evergrande under $300 billion in debt put the world on edge. Now the company is back in the spotlight and its inability to resolve matters with its lenders is casting a shadow over China’s property landscape, already plagued by signs of insolvency.

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

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

Chinese property stocks have plunged, hitting multi-year lows in recent days. Home buyers are scared. And some foreign investors who lent money to Chinese developers are losing faith that they will ever be repaid.

China’s property market, once driven by debt, has been suffering for several years since Beijing cracked down on real estate companies’ ability to take on more debt. In 2021, Evergrande was among the first, and most prominent, to default on a tower of unpaid bills. Dozens of other private developers followed, raising fears about China’s broader economy, which has long relied on the property market for its growth.

China’s exit from crippling pandemic lockdowns earlier this year sparked optimism that some developers could press ahead, buoyed by new home sales and progress in negotiations with creditors. Traders continued to trade bonds from defaulted developers, sometimes for pennies on the dollar, anticipating they could make money once the companies paid off their debts.

But in recent months, the housing market has stumbled and apartment sales have plummeted. The loss of confidence among home buyers limited the few developers who had avoided default.

In recent weeks, Beijing has offered new measures to boost the housing market, such as cutting mortgage rates. Some of China’s largest cities have attempted to ease home-buying restrictions. But their efforts have done little to reverse a broader pessimism among Chinese households who are deeply cautious about spending. A major developer, China Oceanwide, faces a court-ordered liquidation brought about by impatient foreign creditors. Evergrande said last week that it had to reevaluate its own restructuring proposal because its sales had not met expectations, bringing it closer to a possible liquidation.

Along the way, some of the remaining creditors who had faith that the developers would be able to pay some of their bills walked away.

“We consider the sector not suitable for investment,” said Michel Löwy, chief executive of SC Lowy, an investment firm that once had a small position in Evergrande bonds, citing poor information and disclosures.

The problems of Evergrande and other developers have exposed deeper problems within the Chinese financial system, which has long admitted rampant debt, unbridled expansion and often corruption. However, even as regulators have tightened rules and tried to force companies to behave, Evergrande continues to stand out for its poor corporate governance.

When faced with a cash shortage two years ago, Evergrande turned to its own employees, forcing many to lend it money through its wealth management unit. This month, authorities in the southern Chinese city of Shenzhen said they detained some staff at the wealth management unit.

Evergrande confirmed the arrests without providing any details, adding new mystery to a company that has never been particularly diligent about keeping its investors informed. The company then canceled important meetings to complete a restructuring plan, blaming worsening sales, and said it could not issue new debt as part of its restructuring plan because of an investigation into its core business, whose shares trade on the continent.

Investors left in the dark by Evergrande have latched onto media reports in recent days. On Monday, the Chinese media caixín reported that authorities had detained Xia Haijun, former CEO of Evergrande, and Pan Darong, former chief financial officer. The two former executives resigned from Evergrande last year over their involvement in a scheme to divert $2 billion from a subsidiary into the coffers of Evergrande’s main holding company.

Then on Wednesday Bloomberg News reported that Mr. Hui, the president, who was also the founder of Evergrande, had been detained by police and was under residential surveillance. The company has not confirmed the arrests of Messrs. Pan and Xia.

As negotiations over repayment to foreign creditors stall for companies like Evergrande and creditors become more pessimistic, an important source of financing for Chinese companies is drying up.

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

Private Chinese companies will need to be able to raise money from foreign investors if they want to expand, García-Herrero said. Most investors no longer feel comfortable doing so, he said.

“When they need the market, will it be there? I do not think.”

claire fu contributed reports.

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