Evergrande gives Beijing another reason to intervene

Xia Haijun, CEO of China Evergrande Group, attends a news conference on the company’s interim results in Hong Kong, China August 30, 2016. REUTERS/Bobby Yip

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HONG KONG, July 25 (Reuters Breakingviews) – Beijing will find it harder to ignore the growing financial mess of China Evergrande (3333.HK). The developer’s chief executive resigned on Friday after an investigation revealed he helped embezzle funds from a Read More subsidiary. This jeopardizes a $19 billion offshore bond restructuring plan.

The conclusions come at a sensitive time. In March, the company disclosed that banks had seized some $2 billion in deposits at its most valuable subsidiary, Hong Kong-listed Evergrande Property Services (6666.HK). Investigators found that the funds secured loans that eventually ended up with the parent company. While Evergrande quickly replaced CEO Xia Haijun, who emerged embroiled in the settlement with the group’s chief financial officer, he is still required to present a long-promised restructuring plan to creditors on Sunday.

It will be a challenge. A mooted proposal reported by Reuters in May involved letting creditors swap some of their debt for stakes in real estate services unit and electric vehicle subsidiary China Evergrande New Energy Vehicle (0708.HK). This option seems less and less attractive, given the poor financial health of the subsidiaries.

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So far, the central government has refused to bail out Evergrande, opting to largely stay on the sidelines as the company tries to complete pre-sold and unfinished projects. This strategy, however, could backfire as the national housing market crashes. Property sales in value are down 29% in the first six months of the year and new construction starts are down 34%. Now buyers across the country are refusing to pay their mortgages on unfinished developments as construction stalls on around 300 projects. read more Of these, at least 50 are under Evergrande, per consultancy firm E-house.

With confidence in real estate rapidly evaporating, financial and political risks are piling up for Beijing. There are signs that the authorities are preparing a more direct approach by creating a $44 billion real estate fund to support more than a dozen property developers according to the financial website REDD. Read more

Evergrande’s $300 billion in liabilities means it will need a much larger lifeline. Beijing will find it harder to look away.

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BACKGROUND NEWS

China Evergrande said on July 22 that its chief executive and chief financial officer had resigned after a preliminary investigation revealed their involvement in the diversion of loans guaranteed by its Hong Kong-listed unit, Evergrande Property Services, to the group.

Evergrande had been investigating since March how deposits worth 13.4 billion yuan ($1.99 billion) belonging to the property services unit were seized by banks.

Separately, China plans to set up a real estate fund worth up to 300 billion yuan to support more than a dozen real estate developers, including Evergrande, financial information provider REDD reported on July 25, citing sources. sources.

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Editing by Robyn Mak and Thomas Shum

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