Hong Kong, (Reuters) – Shares of embattled property developer, China Evergrande Group, plunged by 25% on Monday following the arrest of its wealth management staff. Police, on Monday detained some of the staff members from China Evergrande’s wealth management unit, suggesting a new probe that could add to the real-estate developer’s woes.
China Evergrande, the world’ most indebted property developer, is at the heart of China’s real-estate crisis that has seen a series of defaults since 2021. The real-estate crisis in China has completely rattled the global markets and have sparked the fears of contagion, as observed previously during the financial crisis in 2008.
The China Evergrande Group is so deeply snowed under the $300 billion debt that the tremors would not only affect China, the contagion might spread beyond its borders.
The Arrest of Wealth Management Staff
In 2021, disgruntled investors had staged a protest at the China Evergrande headquarters, where Du Liang was identified as legal representative and general manager for China Evergrande’s wealth management division.
According to a statement released by the police on social media; “the public security organizations took compulsory measures against Du Liang and other suspected criminals at Evergrande Financial Wealth Management Co.”
As reported by Reuters, it could not confirm the arrest of Du Liang, nor did the police specify the number of people who were detained, charges on them, or when they were actually arrested. Similarly, there was no response from the Evergrande Group.
This led investors off their ground, and the stock market saw China Evergrande shares plunged by nearly 25% to $0.465 in the first trading session of the week. It pared losses, down 11%, lagging just 0.9% fall in the Hang Seng Index.
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China Evergrande’s Woes
Trading in the China Evergrande shares remained at halt for almost 17 months until it reopened a month earlier, and the stock is currently trading at its lowest in the past two weeks. Last month, China Evergrande posted a net loss of 33 billion yuan ($4.5 billion) in the first half of this year.
Though, this loss was significantly lower than a loss of 66.4 billion yuan in the same period last year. Moreover, Evergrande announced earlier this month that it had delayed a decision on an offshore debt restructuring program till the next month.
According to the analysts, the largest property developer in China, China Evergrande Group is on the brink of collapse and bankruptcy is now imminent. Chief Economist for Asia at Capital Economics, Mark William says that, “Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.”
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The background
But, the real question still remains in the minds of our readers: how did we reach such a situation?
After expanding for years and accumulating assets as China’s economy boomed for the longest period, Evergrande is now snowed under a huge $300 billion debt. Moreover, the world’s most indebted property developer is failing to pay its suppliers and had warned its investors twice in a few weeks time that it could go bankrupt.
Evergrande is also projecting a significant drop in its property sales in September after declining for months now, which will further worsen the cash flow situation. Hence, Chinese banks are also responding to its deteriorating cash flow, as HSBC and Standard Chartered had declined to further lend new loans to buyers for two uncompleted Evergrande’s residential projects.
Moreover, rating agencies have continued the feat to downgrade the firm, citing the liquidity crunch. Evergrande’s problems intensified last year when the Chinese government introduced regulations to control the borrowing costs of property developers. Those measures placed a cap on debt in relation with the firms’ assets, cash flow and capital levels.
($1 = 7.2799 Chinese yuan)
