Just a few weeks ago, China Evergrande, the world’s most indebted real estate developer, was writing its next chapter and working to resolve financial disputes with its creditors. Then came a flood of bad news and the pages were torn.
Employees of the company’s asset management department were arrested by authorities. Two former top executives are reportedly being held and the billionaire CEO is under police surveillance. Investors have fled, selling their shares and sending the company’s already weak stock down more than 40 percent in the past week.
Evergrande’s problems deepened on Thursday when it suspended trading in the shares of its three listed companies in Hong Kong without giving any reason.
Later on Thursday, Evergrande confirmed in a filing with the Hong Kong Stock Exchange that its chairman Hui Ka Yan had been subjected to “compulsory measures” by authorities on 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 its executives’ developments, which were disclosed by Chinese police and reported in local and foreign news media. Evergrande had only stated that the company was under investigation and was unable to carry out a critical restructuring of its debt. Investors had to fill the gaps.
The fast-paced events have added growing pressure on policymakers in Beijing as they try to address China’s housing crisis. Two years ago, Evergrande’s collapse under $300 billion in debt sent the world into turmoil. Now the company is back in the spotlight, and its inability to resolve the matter with its lenders is casting a shadow over China’s real estate landscape, which is already littered with signs of insolvency.
Uncertainty over the fate of Evergrande, which employed nearly 110,000 people as of July, is adding to concerns about the dozens of other developers that have defaulted in 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 pay off its debts to bondholders.
“It raises more questions than answers,” said Sandra Chow, co-head of Asia-Pacific research at credit analytics firm CreditSights. “In an environment where people are nervous, it doesn’t help. The mood in the real estate sector was already bad.”
Chinese real estate stocks have slumped, hitting multi-year lows in recent days. Homebuyers are skittish. And some foreign investors who lent money to Chinese developers are losing faith that they will ever get their money.
China’s real estate market, once driven by borrowing, has been suffering 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 most prominent companies to default on a flood of unpaid invoices. Dozens of other private developers followed, sparking fears for China’s overall economy, which has long depended on the real estate market for growth.
China’s exit from crippling pandemic lockdowns earlier this year sparked 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 defaulting developers, sometimes for penny-dollar bills, in the expectation that they could make money once the companies paid off their debts.
But in recent months the housing market has stumbled and apartment sales have declined. A loss of confidence among homebuyers weighed on the few remaining property developers who had averted default.
In recent weeks, Beijing has offered new measures to stimulate the property market, such as lowering mortgage rates. Some of China’s largest cities have moved to ease restrictions on home purchases. But their efforts have done little to reverse the general pessimism among Chinese households, which are extremely averse to spending. A major developer, China Oceanwide, is facing a legal liquidation brought about by impatient foreign creditors. Evergrande said last week that it had to reconsider its own restructuring proposal because its sales had fallen short of expectations, bringing the company closer to possible liquidation.
Over time, some of the remaining creditors who had trusted that the developers could pay some of their bills have defected.
“We think the sector is uninvestable,” said Michel Löwy, chief executive of SC Lowy, an investment firm that once held a small position in Evergrande bonds, citing poor information and disclosures.
The plight of Evergrande and the other developers has exposed deeper problems within the Chinese financial system that have long led to unbridled borrowing, unchecked expansion and often corruption. But even as regulators have tightened rules and tried to force companies to behave, Evergrande continues to be characterized by poor corporate governance.
When Evergrande faced a cash crunch two years ago, it turned to its own employees and urged many to lend it money through its asset management unit. This month, authorities in the southern Chinese city of Shenzhen said they had arrested some employees of the asset management unit.
Evergrande confirmed the arrests without providing details, adding a new mystery to a company that has never been particularly careful about keeping its investors informed. Then the company canceled key meetings to finalize a restructuring plan, blaming deteriorating sales. It also said it could not take on new debt as part of its restructuring plan because of an investigation into its main business, whose shares are traded on the mainland.
Investors left in the dark by Evergrande have stuck to media reports in recent days. On Monday, Chinese media outlet Caixin reported that Xia Haijun, a former CEO of Evergrande, and Pan Darong, a former chief financial officer, had been arrested by authorities. The two former executives resigned from Evergrande last year over their involvement in a plan to funnel $2 billion from a subsidiary into the coffers of Evergrande’s main holding company.
Then Bloomberg News reported on Wednesday that Mr. Hui, the chairman and founder of Evergrande, had been taken away by police and was under residential surveillance. The company has not confirmed the detention of Mr. Pan and Mr. Xia.
As negotiations to repay foreign creditors for companies like Evergrande stall and creditor weakness diminishes, a key source of funding for Chinese companies is drying up.
“The door is closing for Chinese companies to issue debt abroad,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis.
Private Chinese companies must be able to raise money from foreign investors if they want to expand, Ms. García-Herrero said. Most investors are no longer satisfied with this, she said.
“When they need the market, will it be there? I do not believe that.”
Claire Fu contributed reporting.