Image: Alarabiya

The troubles continue to mount for China’s second largest property developer China Evergrande Group, as Chinese authorities revealed its Chairman Hui Ka Yan has been detained over suspected “illegal crimes”.

Evergrande announced in a filing to the Hong Kong Stock Exchange on Thursday that Hui has been “subject to mandatory measures in accordance with the law due to suspicion of illegal crimes.” As a result, trading of Evergrande shares will remain suspended until further notice.

This revelation comes just a day after Evergrande shares were halted on Wednesday. It follows a Bloomberg report earlier this week stating that Hui had been taken away by Chinese police and placed under monitoring at an undisclosed location.

Hui’s detention represents the latest blow for the embattled Evergrande, which was once China’s top selling property developer. The company defaulted on its massive $300 billion debts in 2021 and its shares have been suspended since March 2022. They had only just resumed trading in late August after a 17 month hiatus.

Evergrande Finances Unravel Further

Alongside news of Hui’s detention, Evergrande offered additional revelations about the dire financial situation of its main subsidiary Hengda Real Estate Group.

In a separate stock exchange filing, Evergrande disclosed that Hengda faced a staggering 1,946 pending litigation cases as of end-August 2022. Each case involves claims of over 30 million yuan ($4.2 million), with total claims amounting to 449.3 billion yuan ($63 billion).

Additionally, Hengda has 278.5 billion yuan ($39 billion) in unpaid debts currently. This includes 206.8 billion yuan ($29 billion) in overdue commercial bills.

Evergrande also reported 163 new enforcement cases were filed against Hengda Real Estate in August 2022, involving claims totaling 9.13 billion yuan ($1.3 billion). There were also 68 new cases where Hengda’s equity stakes in subsidiaries were frozen due to enforcement actions.

The revelations underscore the bleak financial position of what was once China’s most prolific property developer. Evergrande has struggled for over a year to manage debts that ballooned to over $300 billion.

Evergrande Defaulted On Debts, Delayed Restructuring

Evergrande first defaulted on its debts in 2021. This led to its shares being suspended in March 2022 and only resumed trading in late August after a prolonged halt.

Earlier this week, Evergrande announced it was unable to proceed with issuing new notes under a proposed debt restructuring plan. The delay came after an investigation was launched into Hengda Real Estate’s finances.

Evergrande also postponed a key debt restructuring meeting with creditors scheduled for September 26. It stated that sales had fallen short of expectations since its restructuring plan was announced in March.

As a result, Evergrande said it needed to “re-assess the terms of the proposed restructuring to meet the company’s objective situation and the demand of the creditors.”

The company, along with units Tianji Holdings and Scenery Journey, also filed for Chapter 15 bankruptcy protection in the U.S. in August.

Evergrande’s Downfall From Top Developer to Debt Default

Evergrande’s downfall represents a steep reversal of fortunes for a company that was once China’s top real estate developer.

Founded in 1996 in Guangzhou, Evergrande grew rapidly during China’s real estate boom in the 2000s under Hui Ka Yan’s leadership. It was the country’s largest developer by sales for several years.

At its peak size, Evergrande had over 1300 real estate projects in 280 cities across China. The company diversified into electric vehicles, sports, entertainment and other businesses.

But Evergrande became overextended after years of aggressive borrowing to finance its rapid expansion. Its debts ballooned to over $300 billion by 2021, making it the world’s most indebted developer.

With China’s property market cooling, Evergrande began struggling to repay debts and its liquidity crisis became apparent in 2021. The company made global headlines when it warned twice that it could default on loans.

Evergrande ultimately defaulted on its debts in December 2021. This led to uncertainty about the impact on China’s property sector and economy. Authorities stepped in to contain the fallout.

The company has since desperately tried to raise funds through asset sales, stake sales and more borrowing. But its liquidity crunch has persisted, delaying project completions and contractor payments.

Evergrande’s restructuring plan announced in March 2022 aimed to extend payment deadlines and settle dues by handing over properties and stakes. But the plan has seemingly stalled, even as Evergrande’s debts continued to mount.

Hui Ka Yan Placed Under Police Monitoring

Evergrande’s announcement of Hui Ka Yan being placed under police monitoring came just one day after its shares were halted on Wednesday.

According to a Bloomberg report earlier this week, Hui was taken into custody by Chinese police earlier in September. He is said to be cooperating with authorities and has been under 24-hour surveillance at an undisclosed location.

Hui, 63, is a Chinese billionaire who founded Evergrande in 1996 and built it into a real estate empire. At Evergrande’s peak, Hui’s net worth was estimated at $45 billion, making him China’s richest man.

But Hui has seen his fortune dwindle along with Evergrande’s decline. He was still worth around $7.3 billion as of September 2022, according to Forbes.

It is unclear if Hui’s detention is directly related to Evergrande’s financial troubles. Chinese authorities have not commented publicly on the reason behind his detention.

But Hui being placed under police monitoring comes at a sensitive time. Evergrande is reeling under massive debts and its restructuring plans appear stalled. Public anger has grown towards Evergrande among homebuyers and investors affected by its problems.

Some analysts believe Chinese authorities may hold Hui partly responsible for Evergrande’s aggressive borrowing. There is speculation the move could pave the way for a state-led restructuring of Evergrande’s debts.

Impact on China’s Property Sector and Economy

Evergrande’s quandary has raised concerns about financial contagion, as it carries major implications for China’s property sector.

Real estate and related industries account for around 25% of China’s GDP. Evergrande’s failure to repay debts can spill over into the broader economy.

So far, authorities have tried to limit Evergrande’s fallout through government intervention and liquidity support. But prolonged uncertainty due to Evergrande’s problems can negatively impact homebuyer sentiment.

Evergrande’s woes have already sparked a surge in debt repayment problems at other Chinese developers. Smaller firms like Kaisa Group and Fantasia have also defaulted on debts.

While Beijing wants to reform the property sector by reducing leverage, it needs to balance those aims with maintaining economic stability.

The detention of Evergrande’s Hui Ka Yan suggests authorities could accelerate restructuring efforts. But the path ahead for resolving Evergrande’s massive debts remains unclear.

The company’s ability to fund ongoing projects and emerge from the crisis while protecting homebuyer interests will be closely watched. But for now, its troubles continue to mount.

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