Evergrande's Chairman Detained: Will the Company Overcome its Struggles?

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Following its default on debt in 2019, Chinese real estate giant Evergrande was expected to undergo restructuring and resume operations. However, this course of action is now under serious threat as the company's chairman and employees at its financing subsidiary have been arrested by the authorities.

Xu Jiayin, also known as Hui Ka Yan in Cantonese, has been subjected to "mandatory measures" by Evergrande due to suspected crimes, according to a filing made by the company to the Hong Kong stock exchange on Thursday. The specifics regarding Xu's whereabouts and the nature of the alleged crimes were not provided by the company. In China, "mandatory" or "compulsory" measures can encompass detention and formal arrest.

Xu established Evergrande in 1996. His detainment raises more concerns about the future of the struggling real estate behemoth. The company had anticipated finalizing a substantial debt restructuring plan under government supervision in the upcoming weeks to prevent a collapse. However, with $300 billion in outstanding liabilities and ongoing financial losses, Evergrande had already alerted on Sunday that the regulatory investigation into its primary property development subsidiary in mainland China might hinder the restructuring plan. Consequently, meetings with creditors have been postponed.

Beijing has definitely altered its stance concerning Evergrande, as what was initially a debt restructuring narrative has now potentially escalated into a criminal case," stated George Magnus, a research associate at the China Centre of Oxford University and SOAS University of London.

Xu Jiayin, chairman of Evergrande, attends a news conference in Hong Kong in March 2016.

Bobby Yip/Reuters/FILE

Evergrande's fate could mirror that of other failed enterprises like HNA Group or Anbang, according to Magnus. These were once prominent private conglomerates in China a decade ago, expanding their reach globally through acquisitions. However, their chairmen were arrested in 2017 and 2021, leading to eventual liquidation and government intervention.

Magnus predicts that this could spell the end for Evergrande as it currently exists. However, it might still have the possibility of being acquired or divided. The company is likely to be taken over and managed by a combination of local government, state developers, and banks.

However, Tyran Kam, Fitch Ratings head of China Properties, has advised that Chinese authorities must exercise caution to avoid a potentially chaotic collapse. Kam believes that the future of the company is uncertain, but he does not believe that the government is intentionally pushing for a liquidation.

Evergrande Group, a troubled Chinese property giant, has sought bankruptcy protection in the United States. The court documents revealed that this move is intended to safeguard its US assets as it endeavors to negotiate a restructuring deal. The photo above, taken on August 18, 2023, captures the Evergrande logo adorning residential buildings in Nanjing, located in China's eastern Jiangsu province. (Photo by STRINGER / AFP) / China OUT (Photo by STRINGER/AFP via Getty Images)

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Evergrande's bankruptcy may be just the beginning of China's real estate crisis

The detention of the chairman may be partially linked to the wealth management unit, according to Kam. Since 2015, this unit has been collecting funds for its parent company from both individual and corporate investors in China's "shadow banking" sector.

Recently, the Shenzhen police detained several employees from the unit. The Shenzhen government's press office stated on its social media account that the unit was suspected of engaging in "illegal fundraising."

Several other Evergrande executives, including Xus son and a former chief financial officer, were detained as part of a broader investigation into the company, as reported by state-owned Yicai on Thursday. The report, citing unnamed sources familiar with the matter, was widely circulated in Chinese media but has since been removed. No response has been received from Evergrande to a CNN request for comment.

Whats next?

Previously Chinas second biggest real estate company, Evergrandes default in 2021 ignited a crisis in the property sector that continues to weigh on the wider economy.

Evergrande announced a $19 billion proposal in March to reconcile with its global creditors. However, it subsequently filed for bankruptcy protection in the United States in August.

Nevertheless, the company recently called off meetings with foreign investors that were scheduled for this week. The reason cited was the need to reevaluate the terms of the restructuring plan, primarily due to lower-than-anticipated sales.

The company's restructuring may be at risk due to the detention of its chairman, ongoing criminal and regulatory investigations, and the inability to secure new debt. Trading in the company's shares has been temporarily suspended after a sharp decline of over 80% since their resumption in August, following a previous 17-month suspension.

Residential buildings in Changzhou, Jiangsu, China are seen in this photograph taken on August 31, 2023. The housing credit policies in China will undergo adjustments and optimizations, as announced by the country's financial watchdogs. In a joint statement issued by the People's Bank of China and the National Administration of Financial Regulation, it was revealed that interest rates for existing mortgages for first-home purchases will be reduced. The image is credited to Sheldon Cooper/SOPA Images/LightRocket via Getty Images.

A former official concedes that even with a population of 1.4 billion, China's empty homes cannot be filled. "If Evergrade is unable to issue new debt or equity, the debt restructuring cannot effectively take place, which appears to be the case," Magnus stated.

If there is no last-minute resolution to facilitate new issuance, the plan appears to be destined for failure. The possibility of such a resolution relies heavily on the intentions of the government and regulators regarding Evergrande. In the event of a failed restructuring and the inability to negotiate a fresh agreement with creditors, liquidation could become a daunting prospect for Evergrande.

A petition has been filed by an investor in the company in Hong Kong, aiming to compel the closure of the business. There are indications that an increasing number of investors are considering joining the effort if the company fails to devise a new survival strategy promptly.

Kam mentioned that the decision to liquidate will be contingent upon the course of action pursued by the bondholders with their proposal.

However, a liquidation will be a "messy process" for all creditors, he added. When a company liquidates, its assets are frozen, and it stops operations.

Too many homes

The potential implications of this are significant.

By the conclusion of 2022, Evergrande retained a workforce of over 100,000 individuals and had approximately 800 ongoing real estate initiatives aiming to construct around 700,000 apartments across more than 200 cities throughout China. The market is already saturated with unoccupied properties to an extent where, based on a recent analysis, they could accommodate the entire population of the country.

Over the past two years, numerous protests have been conducted by the employees, investors, and home buyers in order to demand unpaid salaries, reimbursement for investment losses, and compensation for incomplete homes. Additionally, there are significant implications for the thousands of home buyers who have already made prepayments for their units, as well as for the broader economy and domestic and international financial markets.

The China Evergrande Group logo displayed atop the company's headquarters in Shenzhen, China, on Thursday, Sept. 30, 2021.

Gilles Sabrie/Bloomberg/Getty Images

Evergrande stock crashes again as fears of collapse grow

"The government is concerned about the potential financial suffering and home losses of the revered middle class, but the company is increasingly causing embarrassment to the authorities," Magnus stated.

Although the government might be inclined to allow Evergrande to collapse, the repercussions on households and the already weakened real estate market could be excessively significant," he suggested, further noting that officials might implement measures to mitigate the consequences for home buyers and investors.

Kam, a representative at Fitch, anticipates that the government will analyze methods to stabilize the market following the downfall of Evergrande. This includes devising strategies to ensure the continuity of its operations and the successful completion and delivery of its projects.

In contrast, Magnus asserts that Evergrande's era as an independent entity has come to an end.

Evergrande is gradually being dismantled, despite efforts to sustain its operations and fulfill the promised properties or handle the existing ones.