Investigating Evergrande’s links with the regional bank is a new threat

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The main Chinese banking regulator is preparing to conduct an investigation into the relationship between Evergrande and a little-known Chinese regional bank, which could pose a new threat to the world’s most indebted real estate group and its billionaire founder Hui Ka Yan.

Chinese media reported in May that the China Banking and Insurance Regulatory Commission (CBIRC), the country’s main banking regulator, was reviewing more than Rmb100 billion ($ 15.6 billion) in transactions involving the Shenzhen-based developer and Shengjing Bank, a listed lender in Hong Kong. it belongs in part. The investigation is coming to an end, according to two people familiar with the matter.

The regulator has looked at how the bank has been exposed to Evergrande’s debts and Hui’s role in corporate relationships, the people added. Chinese media reported that the regulator has focused on deals involving Evergrande and Shengjing, in which the developer has a significant stake.

A person familiar with the investigation said there appeared to have been potential regulatory violations by Shengjing and Evergrande above the threshold for eligible debts owed by a single borrower.

Repeated phone calls to Shengjing Bank and emails seeking comment have not been answered.

Evergrande did not respond to a request for comment about the company or Hui.

The investigation by the Chinese banking authority covers a period of major upheaval for Evergrande, which has engulfed itself in a liquidity crisis that shook the world markets. The developer’s difficulties also cast doubts on the health of the real estate sector at large, which underpins China’s economic growth model.

The regulator’s effort has grown in importance as Beijing grapples with what would be one of the the biggest debt restructurings in Chinese history, Evergrande’s total liabilities exceed $ 300 billion.

The developer announced the sale of $ 1.5 billion a 20 percent stake in Shengjing Bank in late September to a financial group owned by local authorities in northeast Shenyang City. The deal was part of Evergrande’s rush to sell assets days after faded away a large interest payment on an offshore bond.

Evergrande said at the time that the sale of the stake was intended to free up capital and address the “negative effects” of its liquidity problems on the bank.

But he added in the same regulatory filing that Shengjing demanded that the net proceeds be used to repay Evergrande’s debts to the bank, raising questions as to whether the developer had relied on a company he partially owned. for funding.

China Lianhe Credit Rating, a Beijing-based rating agency, said in a July report that Shengjing Bank had “violated regulatory restrictions and required continued attention,” and added that it had a “high degree of risk exposure for anonymous customers “.

Among the issues cited by the report were the loans that Shengjing Bank had made to “related borrowers,” which potentially included shareholders. He did not name the borrowers.

Evergrande’s sale of part of its stake in Shengjing has also caught the attention of an international bond group. Bond advisers told them last month that using the proceeds to repay another lender could amount to “preferential treatment” at a time when it was unclear whether or not he would be paid.

Evergrande near miss transferring funds in late October before a grace period ends, but faces another deadline today.

Evergrande bond prices have lost most of their value since the survey’s first reports. The developer faced a number of subsequent setbacks, including project delays and missed bond payments, which highlighted the sector vulnerability.

Other Chinese developers, including Sinic, Fantasia, and China Modern Land, are in default on their obligations. The real estate company Kaisa, a major borrower on the international bond markets, pleaded for “patience” this week as he sought to raise funds through asset sales.

Hui, ancient richest man in China, continued to sell assets with the aim of raising funds and avoiding official default. But the divestment from Shengjing Bank was the only significant deal reached in recent months.

The purchase of the stake by public investors was also the clearest sign of government involvement at a time when Beijing’s exact role in determining Evergrande’s future was unclear.

In some previous cases, concerns about the links between individuals, businesses and banks have led to state action. Baoshang Bank was taken over by the government in 2019 after it collapsed over excessive lending to companies controlled by Tomorrow Group, a financial and investment conglomerate run by the billionaire financier Xiao Jianhua, which also held a significant stake in the bank. Xiao disappeared after being removed by Chinese security guards from a suite in Hong Kong in 2017.

Shen Meng, director of Chanson & Co, a Beijing-based investment bank, warned that some Chinese banks that had become controlled by private companies appeared to have been forced to make large loans to their private shareholders.

For Chinese companies facing high demands for liquidity, especially private real estate developers, buying a stake in a commercial bank had become an important “flexible” solution, he said.

But such partnerships were a “hidden danger,” Shen added, allowing shareholders to take advantage of low-cost credit for huge expansions or, in the face of an increasingly difficult business environment, to use the bank to extend credit.

The CBIRC released new measures to strengthen oversight of controlling shareholders of banks in June.

However, Alicia García Herrero, chief economist for Asia-Pacific at French investment bank Natixis, said banking regulators could have acted more quickly after the Baoshang collapse to order shareholders of small lenders – a important cause of related party risks – to divest.

“The lesson has not been fully learned. . . it looks like it hasn’t been done, ”she said.

Reporting by Sherry Fei Ju in Beijing, Sun Yu in Shanghai, Primrose Riordan and Thomas Hale in Hong Kong and Edward White in Seoul


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