A few weeks ago, China Evergrande, the world’s most indebted real estate developer, wrote its final chapter in an attempt 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.
Trouble swirling around Evergrande — at the center of a housing crisis threatening the economy — deepened on Thursday when the company halted trading in its three publicly traded shares in Hong Kong without giving a reason.
Evergrande has provided little information on recent developments involving its executives, released by Chinese police and reported in local and foreign news media. Instead, outsiders fill in the blanks of reports that Evergrande is under investigation and unable to move forward with a critical restructuring of its debt.
The fast-moving events add to the 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.
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 fueled 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.
But in recent months, the housing market has faltered and apartment sales have fallen. A loss of confidence among homebuyers restrained some developers who avoided defaults.
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 it leveraged to lend through its wealth management division. This month, authorities in the southern Chinese city of Shenzhen said they had detained some employees in the 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. After that, the company called off important meetings to finalize the renovation plan. It also said it could not issue new debt because of an investigation into its core business, which is trading shares in the mainland, as part of its restructuring plan.
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 over their involvement in a scheme to funnel $2 billion from a subsidiary into the coffers of Evergrande’s main holding company.
Then on Wednesday, Bloomberg Hui Ka Yan, the founder of Evergrande, has been taken away by police and is reportedly under residential surveillance. Mr. Pan, Mr. Chia or Mr. The company did not confirm the detentions of Hui, but on Thursday suspended trading of three publicly traded companies in Hong Kong.
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.”