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New Trouble Roils China Evergrande, Fueling Real Estate Crisis Fears

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

Staff at the company’s wealth management arm have been detained by the authorities. Two former top executives are reportedly being held and its billionaire chairman is under police surveillance. Investors have fled, selling off their shares and sending the company’s already depressed stock down more than 40 percent over the past week.

Evergrande’s troubles deepened on Thursday when the company suspended trading in the stock of its three publicly traded companies in Hong Kong without giving a reason.

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

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

The fast-moving events have added to mounting pressure for policymakers in Beijing trying to address China’s property crisis. Two years ago, Evergrande’s collapse under $300 billion of 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 pall over China’s real estate landscape, already littered with signs of insolvency.

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

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

Chinese real estate stocks have plummeted and in recent days hit multiyear lows. Home buyers are skittish. And some foreign investors who lent money to Chinese developers are losing faith that they will ever get paid.

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

China’s exit from paralyzing pandemic lockdowns at the start of this year unleashed optimism that some developers would be able to move forward, buoyed by new home sales and progress in negotiations with creditors. Traders continued to swap bonds of defaulted developers, sometimes for cents on the dollar, anticipating that they could make money once the companies sorted out their debts.

But in recent months, the housing market has stumbled and sales of apartments have plunged. A loss of confidence among home buyers constrained the few remaining developers that had averted default.

In recent weeks, Beijing has offered new measures to bolster the real estate market, like slashing mortgage rates. Some of China’s biggest cities have tried to ease restrictions on home purchases. But their efforts have done little to reverse a broader pessimism among Chinese households that are deeply wary of spending. One big developer, China Oceanwide, is facing a court-ordered liquidation brought on by impatient overseas creditors. Evergrande said last week that it had to reassess its own restructuring proposal because its sales had failed to meet expectations, bringing it closer to a possible liquidation.

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

“We find the sector uninvestable,” 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 woes of Evergrande and the other developers have exposed deeper problems within the Chinese financial system, which long accommodated unrestrained borrowing, unchecked expansion and, often, corruption. Yet even as regulators have tightened the rules and tried to force companies to behave, Evergrande continues to stand out for poor corporate governance.

When faced with a cash squeeze two years ago, Evergrande turned to its own employees, strong-arming many into lending it money through its wealth management unit. This month, the authorities in the southern Chinese city of Shenzhen said they detained some staff in the wealth management unit.

Evergrande confirmed the detentions without providing any details, adding fresh mystery to a company that has never been particularly diligent about keeping its investors informed. Then the company called off important meetings to finalize 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 main business whose stock trades on the mainland.

Investors left in the dark by Evergrande have clung to media reports in recent days. On Monday, the Chinese media outlet Caixin reported that Xia Haijun, a former chief executive of Evergrande, and Pan Darong, an ex-chief financial officer, had been detained by the authorities. The two former executives resigned from Evergrande last year over their involvement in a plan to siphon $2 billion from a subsidiary into the coffers of Evergrande’s main holding company.

Then on Wednesday, Bloomberg News reported that Mr. Hui, the chairman who was also Evergrande’s founder, had been taken away by police and was under residential surveillance. The company has not confirmed the detentions of Mr. Pan and Mr. Xia.

As negotiations over repaying foreign creditors stall for companies like Evergrande and creditors turn more downbeat, an important source of funding for Chinese companies is drying up.

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

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

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

Claire Fu contributed reporting.


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