Shares of China Evergrande Group plunged 25% as markets opened in Hong Kong on Monday (Sept 18), before clawing back a fair chunk of those losses in later trading.
The plunge followed the arrest on Saturday of several of the embattled developer’s employees in southern China.
Evergrande’s stock price dipped to HK$0.47 in early morning trade, the lowest in two weeks. It pared losses by 10am local time, down 11%, lagging a 0.9% fall in the broader Hang Seng Index. Its shares were down 1.6% at the close of trading.
Meanwhile, shares of China’s biggest private developer Country Garden fell by 1.9% at the close of trading, as it faces another liquidity test – a deadline on Monday to pay $15 million in interest linked to an offshore bond, after dodging default at the last minute twice earlier this month (see below).
For Evergrande, the drop comes two days after police in the southern Chinese city of Shenzhen said in a statement they had arrested several employees of the group’s financial subsidiary, Evergrande Wealth Management.
The authorities did not specify the number of employees or the charges against them. The statement called on the public to report any cases of suspected fraud.
But a notice posted on the WeChat account of the Shenzhen’s government press office said the wealth unit has suspected of “illegal fundraising”, a report by CNN said on Monday.
“According to the current public information, Evergrande Wealth and its related parties illegally collected funds to form an internal fund pool, violated the contract and mismatched product investment directions and deadlines, causing losses to investors,” the report quoted the article as saying, adding that the move aimed to achieve a ‘timely’ criminal case that could help “the recovery of damages and may reduce losses suffered by investors”.
Evergrande is the world’s most-indebted property developer and had an estimated debt of $328 billion at the end of June.
The group has been at the centre of China’s deepening property sector crisis, which has spurred fears of a global spillover.
Trading in the company’s stock was suspended for 17 months until August 28.
Once a star player in an industry key to China’s economic growth, Evergrande’s enormous debt has been seen by Beijing as an unacceptable risk for the country’s financial system.
Authorities have gradually tightened developers’ access to credit since 2020, and a wave of defaults has followed – notably that of Evergrande in late 2021.
On Friday, China’s national financial regulator greenlighted a takeover of Evergrande’s insolvent insurance subsidiary, Evergrande Life Insurance, by new state-owned vehicle Haigang Life Insurance.
Country Garden’s latest test
While Evergrande’s massive debt level has been known since late 2021, news that Country Garden was losing its ability to repay its huge debts only became widely known in recent months.
Country Garden’s financial woes have worsened the property sector outlook because it has a far greater number of projects across China – over 3,100, compared to Evergrande’s 800 or so, according to a report by Oxford Economics.
Country Garden, which has total liabilities of 1.4 trillion yuan (nearly $192 billion), will have a 30-day grace period to pay the coupon before it would be considered in default.
If Country Garden fails to pay the $15 million before the grace period ends in mid-October, the principal will become due immediately and any failure to service will trigger cross-default terms, Sandra Chow, co-head of Asia-Pacific research at CreditSights, said.
“It’s going to be really hard,” for Country Garden to meet debt obligations due to its tumbling cash levels at a time when property sales in the world’s second-largest economy remained very weak, Chow said.
Creditors back extension of bond repayments
The government’s deleveraging targeted the massive debts accumulated by groups such as Evergrande and Country Garden but created a debt crisis that spread across the property sector. However, that appears to have ended, with Beijing unveiling a raft of support measures recently.
A Country Garden spokesperson did not respond to a request for comment on Monday about its latest debt repayment obligation.
Country Garden warned last month of default risks if its financial performance continues to deteriorate. It has 108.7 billion yuan ($14.9 billion) of debt due within 12 months but cash of only around 101 billion yuan as of June.
It avoided default by winning approval from its creditors to extend payments for an onshore private bond, in a major relief for the embattled Chinese developer as well as the crisis-hit property sector.
The developer in August missed coupon payments worth $22.5 million tied to two dollar bonds but managed to wire funds before a grace period ended earlier this month, dodging a default.
Last week, onshore bondholders approved to extend repayments of seven other Country Garden bonds by three years.
Country Garden is one of the few large Chinese developers that have not defaulted on debt obligations. Many creditors believe that Country Garden will have to restructure its offshore debt if it doesn’t get liquidity support soon.
Some offshore creditors of Country Garden have started talks with New York-based law firm Kobre & Kim LLP and London-based Ashurst and are looking at forming groups if the property developer seeks to restructure its debt.
- Reuters with additional reporting and editing by Jim Pollard
NOTE: The headline on this report was amended and the content expanded on Sept 18, 2023 to include details about Country Garden shares and the group’s latest debt deadline, plus details on the Evergrande wealth unit arrests, and closing share prices.