Evergrande's Shadow Bank Plunges Deeper as Police Detain Staff: Shocking Revelation!

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Following the failure of Evergrande, a besieged property developer, to compensate investors, Chinese authorities have detained several employees from its wealth management division. This marks the first instance of a criminal investigation initiated against the company since it was engulfed by a significant debt crisis in late 2021.

Shares in the company plummeted by up to 26% in Hong Kong on Monday, but eventually regained a significant portion of the losses and closed 1.6% lower.

According to a statement released on Saturday by the police in Shenzhen, the city where Evergrande is based, several employees at Evergrande Wealth have been recently apprehended. Evergrande Wealth has been operating in China's "shadow banking" industry since its establishment in 2015, gathering funds for its parent company from both individual and corporate investors.

Shadow lenders, such as trust firms, function independently from the official banking system. They operate with minimal regulations and play a significant role in China's financial sector by directing funds towards high-yield investments.

As a result of the country's economic challenges, certain firms have experienced failures and others have incurred losses. This has sparked concerns about the potential emergence of a more significant financial crisis.

Another Chinese shadow lender, Zhongrong Trust, has admitted its failure to repay a portion of its products within the designated timeline. As a solution, the company has entrusted the management of its affairs to two state-backed firms, namely CCB Trust and Citic Trust, for a duration of one year, up until September 2024.

In Shenzhen, the authorities have initiated an investigation into the employees who have been detained from Evergrande Wealth. They have also urged the company's investors to come forward and provide any relevant information.

On August 31, 2023, a residential area of Country Garden in Nanjing, Jiangsu province, China is captured in this photo. Country Garden recently released their performance report for the first half of 2023, revealing a total revenue of 226.31 billion yuan, marking a significant increase of 39.4%. However, the company also reported a core net loss attributable to shareholders of approximately 45.35 billion yuan. (Photo credit: CFOTO/Future Publishing via Getty Images)

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One of the detainees was identified as "Du" without providing further information regarding the timing of the detentions and the specific allegations. According to an unnamed source, the state-owned Shanghai Securities Journal reported that the general manager and legal representative of Evergrande Wealth is among those who have been detained.

CNN has reached out to Evergrande and Evergrande Wealth for comment about the investigation, but hasnt received a response.

Illegally collected funds

The Shenzhen government's press office released an article on its official WeChat account on Saturday, providing further information about the detentions. It stated that Evergrande Wealth was under suspicion for engaging in "illegal fundraising."

The article revealed that Evergrande Wealth and its affiliates unlawfully accumulated funds to create an internal fund pool. This action violated contractual agreements and resulted in the misalignment of investment directions and deadlines for their products, ultimately causing financial losses for investors.

The police action aimed to expedite the establishment of a criminal case, promoting the recovery of damages and potentially minimizing investor losses. It further stated that the detention of Evergrande employees would contribute positively to the regulation and stability of the financial market.

The company logo is seen on the headquarters of China Evergrande Group in Shenzhen, Guangdong province, China September 26, 2021.

Aly Song/Reuters

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Evergrande, once a leading real estate developer in China in terms of sales, now finds itself burdened by an enormous debt caused by years of aggressive borrowing to support its extensive land acquisitions. In December 2021, the company experienced a debt default, leading to a severe property crisis in the world's second-largest economy. To raise capital, Evergrande had ventured beyond traditional sources like bank loans and bonds, utilizing the less regulated shadow banking market in China, which includes trusts and wealth management products.

The information disclosed by Evergrande last month reveals that the total raised amount from these financial products reached 92.1 billion yuan ($12.6 billion). However, as of the end of last year, a notable portion of 34 billion yuan ($4.7 billion) still remained unpaid.

Multiple protests

Evergrandes wealth unit encountered issues which came to public attention in August 2021, leading to the suspension of financial product issuance due to repayment difficulties. Following that, discontented investors staged protests in Evergrandes Shenzhen headquarters and various other cities, demanding the company to fulfill its outstanding obligations.

Creditors gathered at Evergrande's Shanghai office in September 2021 to protest about the lack of payment.

Evergrande Wealth has put forth various repayment plans in order to satisfy its creditors. The latest plan, disclosed in November, entails providing investors with monthly payments of 2,000 yuan ($275) until the debt is fully settled.

However, the unit issued an apology in May, stating that despite their dedicated efforts to raise funds and successfully completing 20 installments, they faced financial constraints that prevented them from repaying their investors that month due to unsatisfactory capital recovery. Regrettably, on August 31, the firm expressed another apology as they were unable to secure the necessary funds to make the payment in the previous month.

In Nanjing, in China's eastern Jiangsu province, the logo of Evergrande, an embattled Chinese property giant, is prominently displayed on residential buildings. On August 17, 2023, Evergrande Group took the step to file for bankruptcy protection in the United States, as revealed by court documents. This move aims to safeguard its assets within the US while the company explores possibilities for a restructuring deal. The accompanying photograph illustrates this situation. (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 Evergrande Group is currently undergoing a government-led debt restructuring process, initiated in late 2021 following its default. In a recent stock exchange filing, it was announced that the decision regarding the restructuring of offshore debts has been postponed until October.

In August, the company filed for bankruptcy in the United States as part of its restructuring efforts. Shortly after, it announced a considerable reduction in net losses for the first half of the year, attributing it to increased revenue from a thriving property market earlier in the year.

However, the company continues to face numerous challenges, as its total liabilities amounted to 2.39 trillion yuan ($328 billion) as of the end of June.