Hong Kong Exchange suspends trading in shares of troubled developer Evergrande

China’s largest developer China Evergrande is back in the headlines: the Hong Kong Stock Exchange suspended trading in the company’s shares, and its founder found himself under police surveillance. Now the most likely scenario is the introduction of external control by the authorities.

On September 28, the Hong Kong Stock Exchange suspended trading in shares of one of China’s largest real estate operators, China Evergrande Group, without explanation. On September 27, the company’s stock fell by 20% for the second time in a month after Bloomberg reported that Evergrande founder and chairman Xu Jiayin (Hui Ka Yan in Cantonese) had been sent to an undisclosed location by police without being allowed to leave.

Xu is prohibited from meeting other people without special permission from the authorities, and his documents were confiscated. But formally, according to Chinese law, this measure is not considered detention or arrest. There have been no official comments from Chinese law enforcement agencies yet.

The company’s total debts are close to $330 billion (comparable to Finland’s GDP). Evergrande resumed trading of its shares only on August 28, 2023, after a 17-month hiatus since March 2021, when the developer’s significant problems became known. Then Evergrande missed the bond payment deadline twice, and by the end of 2021, Fitch Ratings and S&P Global announced a “selective default” by the developer.

On September 16, Shenzhen police posted on Wechat that they had detained several more Evergrande employees, including a man surnamed Du. And on September 24, Evergrande’s main domestic unit, Hengda Real Estate Group, said in a report to the Shenzhen Stock Exchange that it had failed to pay principal and interest on 4 billion yuan ($547 million) in bonds due by September 25. This is also due to inspections of Hengda that began in August by the China Securities Regulatory Commission, which suspects the company of violating information disclosure.

On September 25, Evergrande announced the failure of the debt restructuring plan, which was presented back in March 2023. It, in particular, included the provision of securities to creditors tied to equity participation in other segments of the holding, including in the production of electric cars. Back on September 22, Evergrande management canceled a series of meetings with its creditors, where it was planned to renegotiate the terms of debt restructuring in the amount of $31.7 billion, as the developer’s sales turned out to be worse than expected.

As The New York Times wrote, on August 17, 2023, China Evergrande Group filed in New York for bankruptcy protection under Chapter 15 of the US Bankruptcy Code. This allows you to protect local assets from creditors while work is underway to restructure debts in other countries. On October 30, Evergrande faces a court hearing in Hong Kong on the claim of one of the affected investors, which in theory could lead to its liquidation. According to Reuters, major investors may also join the lawsuit if they are not presented with a new debt repayment plan by this time. According to The Wall Street Journal, at the end of June 2023, China Evergrande’s total debt was 2.39 trillion yuan ($327.5 billion).

Other major players in the Chinese real estate market have also recently encountered serious problems. On September 25, China Oceanwide said it was facing liquidation following a Bermuda court ruling. The largest developer by sales volume in 2022, Country Garden is still trying to avoid default due to debts exceeding $200 billion. So far, it has been able to obtain a deferment from Chinese investors to pay the principal amount of 3.9 billion yuan ($537 million) ) until 2026. Country Garden’s problems arose both from the withdrawal of investors and from falling demand, which led to a huge housing glut in China.

According to the National Bureau of Statistics of China, the total area of ​​unsold houses at the end of August 2023 reached 648 million square meters. m. Former deputy head of the department He Keng said at a forum in Dongguan in August that, probably, even all 1.4 billion Chinese could not populate such an area. The Chinese authorities tried to stimulate demand for real estate by expanding the concept of “first apartment buyer” in the summer – any citizen who is not burdened with a mortgage is now considered to be such a person, regardless of whether he or she purchased real estate previously. For such buyers, the down payment is 2 times less than for others. In total, the real estate sector provides about 20% of China’s GDP.

What is happening to Xu Jiayin is a consequence of the general crisis in the Chinese real estate sector, notes Vasily Kashin, director of the Center for Comprehensive European and International Studies at the Higher School of Economics. In general, China is now undergoing a natural restructuring of the industry, which cannot disrupt the stability of its economy, he adds.

The situation with Evergrande is unlikely to have a significant impact on the prospects of the entire Chinese economy and will not cause a large-scale crisis, but the fate of the largest company is apparently already predetermined, says Andrey Kochetkov, leading analyst at Opening Investments. The latest news says that, most likely, it will soon be declared bankrupt and external management will be introduced. The Chinese authorities will most likely prefer to merge Evergrande with another developer in order to complete existing projects, Kochetkov suggests.

The problems of other developers are due to their own policy, when they gave borrowers from their own funds amounts to make a down payment on a mortgage, which led to an increase in bad loans. As a result, companies began to experience cash gaps, explains Kochetkov. At the same time, authorities have recently relaxed the rules for purchasing housing in a number of regions, including Beijing and Shanghai, and the largest banks have created a financial pool to support stable developers by buying out their bonds, but Evergrande was not included in this program, the analyst concludes.