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The backstory: As we’ve reported before, Evergrande, a major player in China’s real estate world, has been facing lots of financial turbulence. It all started when the company found itself drowning in liabilities of over US$300 billion. It was the first property giant to default on its debts in 2021, which caused a snowball effect in the country’s property sector. Think of it like a stone thrown into a calm pond – ripples of chaos followed. There were more defaults and homebuyers going on protests, and even the government was feeling the economic strain. All of this was a really big deal because China's real estate sector contributes to up to 30% of the nation's GDP.
Over 70,000 investors, including many Evergrande employees, were left hanging in the balance, with their financial stability on the line. Evergrande has been working on an ambitious debt restructuring plan to sort out this mess, but it's been delayed several times.
More recently: Fast forward to last month, Evergrande's trading resumed after a 17-month hiatus. But the company pushed back some crucial votes on its restructuring plan to September. Then, the decision got delayed again and pushed back to October.
Basically, Evergrande is crossing its fingers for creditor support, and the success of this plan hinges on a thumbs-up from over 75% of creditors in each debt class. It’s even offering creditors the option to swap debt for equity or shares tied to Evergrande's assets on the Hong Kong stock exchange.
On top of that, Evergrande's money management arm hit a roadblock last month. Evergrande couldn't meet its payment obligations due to a severe cash crunch, adding to the growing list of troubles.
The development: In the latest twist in the Evergrande saga, Chinese authorities have taken individuals connected to China Evergrande Group's money management segment into custody. This takes things into the realm of the criminal justice system. This went down in Shenzhen and was confirmed through an official statement on social media. The statement revealed just one detainee by the name of Du, but it didn't mention specific charges or how many individuals were detained.
It's important to note that Evergrande Financial Wealth Management, a subsidiary wholly owned by Evergrande since 2015, is at the heart of this investigation. The authorities encourage investors to step up with information, saying that the investigation is ongoing.
Meanwhile, the Chinese government is taking steps to establish a joint venture that will take control of Evergrande's insurance arm. State-backed Hai Gang Life is set to manage Evergrande Life Assurance, and the National Administration of Financial Regulation has officially confirmed this move on Friday.
"The China property sector is like a black hole, so many developers have been dragged into it since two years ago after Evergrande," said Winner Zone Asset Management CEO and CIO Alan Luk. "The central government has yet to introduce (strong) measures because this is too large a hole to fill."
"We sold all our Chinese real estate stocks in April 2020 and haven't bought back any since," said Qi Wang, CEO of Hong Kong-based MegaTrust Investment. "Wouldn't touch the private developers with a 10-foot pole right now."
"To be sure, the economic downturn is putting a great deal of strain on financial sector balance sheets, and it does increase the risk of a messy policy mistake if officials don't handle the situation with care. But we still think a full-blown financial crisis is a tail risk rather than a probable outcome," said Capital Economics in a report.