Founder of China Evergrande Faces Investigation, Halting Company Shares

29 Sep, 2023

Founder of China Evergrande Faces Investigation, Halting Company Shares

The founder of China Evergrande Group is currently under investigation for suspected "illegal activities," according to the troubled property developer. This revelation has raised concerns among creditors as they grapple with the company's uncertain debt restructuring plan and the potential for liquidation.

China Evergrande, which is the world's most indebted property developer with over $300 billion in total liabilities, did not provide details about the nature of the investigation or whether Hui Ka Yan is still actively managing the company. Trading of the company's shares was halted after reports emerged that its chairman was under police scrutiny, and Evergrande has announced that the suspension will remain in effect until further notice.

This development marks the first instance where authorities may hold the billionaire founder accountable for the financial troubles that have sent shockwaves through the property sector, a significant contributor to China's economy.

The ongoing turmoil in China's debt-ridden property sector poses a threat to Beijing's efforts to stabilize the economy and raises concerns among investors about potential spillover effects on the banking system. Evergrande, once China's top-selling developer, has faced a series of crises since its liquidity issues came to light in 2021 and its offshore debt obligations defaulted later that year.

The reasons for Hui's police surveillance remain unclear, but it may be related to negotiations with the government. This latest development has disrupted hopes of a successful restructuring, according to Gary Ng, Asia Pacific senior economist at Natixis. While no developer is considered "too big to fail" in China, government intervention to maintain stability remains a possibility.

Evergrande has been striving to obtain the consent of its creditors for the overhaul of its overseas debt. Nevertheless, the situation grew more intricate when Evergrande disclosed its inability to issue fresh debt owing to an inquiry into its primary Chinese subsidiary. Analysts are now indicating that the prospects for the offshore debt restructuring blueprint are in jeopardy, heightening the chances of the company ultimately undergoing liquidation.

There have been reports that a major group of Evergrande's offshore creditors plans to file a liquidation court petition against the developer if a new debt restructuring plan is not submitted by the end of October.

Given the potential impact on the financial system and the broader economy, Chinese authorities may intervene further to manage the situation. Christopher Beddor, deputy director of China research at Gavekal Dragonomics, notes that they have so far managed to prevent a systemic crisis caused by one developer but are likely to intervene if Evergrande's situation threatens contagion.

According to Chinese media reports, additional Evergrande executives are currently the subject of investigations. The company has not responded to requests for comments.

The investigation into Hui marks a significant fall from grace for the 64-year-old founder, who, just two years ago, was influential in power circles and confident about his business. Analysts believe that Evergrande's debt troubles have had a significant negative impact on the global economy.

These developments occur as Beijing has implemented various measures in recent weeks, including reducing mortgage rates and exempting urban land used for affordable housing projects from taxes. While these regulatory changes may provide some stability to the housing market in China, the overall economic conditions have kept the appetite for property purchases subdued.

The overhang of housing inventories in lower-tier cities, coupled with population decline, is expected to persist for several years, potentially leading to more headlines about defaults, restructuring, and the liquidation of insolvent developers. This situation could result in losses for shareholders, bondholders, banks, and investors in trust and wealth management products linked to property projects.