Evergrande Executives Apprehended Amid Debt Crisis Probe

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Chinese authorities have apprehended individuals from the wealth management unit of Evergrande, in a first criminal probe against the beleaguered property developer, whose debt crisis in late 2021 sent shockwaves through global financial markets. The company stock saw a precipitous plunge of 26% on the Hong Kong stock exchange Monday, however, later pared back most of the losses, closing 1.6% lower.

The personnel were apprehended in Shenzhen, the Southern Chinese megacity where Evergrande is headquartered. Evergrande Wealth has been amassing funds since 2015 for its parent organization from individual and company investors in China’s “shadow banking” sector. This sector includes lightly regulated trust firms, and while operating outside of the formal banking system, they play a crucible role, channeling funds towards high-yield investments in China.

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Several firms have succumbed to China’s escalating economic pressures, fueling apprehensions of a larger financial crisis. Zhongrong Trust, another Chinese shadow lender, admitted to defaulting on some repayments, pledging management to state-backed firms CCB Trust and Citic Trust until September 2024.

Authorities in Shenzhen are actively investigating the Matter involving Evergrande Wealth’s staff, soliciting information from investors. While specifics, including the timing of the detentions and the full extent of allegations, remain unclear, reports suggest one of the detainees is the general manager and legal representative of Evergrande Wealth.

The Shenzhen government gave additional insights into the arrests, suggesting that Evergrande Wealth might have engaged in illegal fundraising. The publicized information stated that Evergrande Wealth violated contractual obligations, mismatched investment directions and deadlines, causing significant setbacks to investors.

This sudden police intervention is aimed at facilitating a criminal case and in aiding the recovery of damages. Additionally, it will potentially diminish the losses of investors. The statement further reinforced that the arrest of Evergrande staff is expected to positively steer the financial market.

Once known as one of China’s major developers by sales volume, Evergrande is now buried under mounds of debt amassed over years of ardent borrowing to underpin its land procurement frenzy. In December 2021, the company defaulted on its debt, triggering a severe property crisis in the globe’s second-largest economy that is still trying to grapple with its aftermath.

Apart from traditional bank loans and bonds, Evergrande also manoeuvred the loosely regulated shadow banking market of China, incorporating trusts and wealth management products, to muster funds. According to Evergrande’s disclosure last month, funds raised through such means amount to 92.1 billion yuan ($12.6 billion), out of which 34 billion yuan ($4.7 billion) remained unsettled by the end of 2021.

Evergrande Wealth first encountered troubles in August 2021, halting the issuance of financial products due to repayment complications, resulting in protests from investors. They launched several repayment programs to mollify its creditors, but despite making substantial efforts in fundraising, they fell short of monetary resources required for repayment.

Currently undergoing a government-guided debt restructuring which commenced shortly after its default, the Evergrande Group recently delayed its offshore debt restructuring decision to October. In August, during the restructuring, it filed for bankruptcy in the United States. Despite a temporary boom in the property market bolstering its revenue and narrowing net losses, it continues to grapple with an astounding liability of 2.39 trillion yuan ($328 billion) at the end of June.