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Chinese property shares shaken by Evergrande investigation

Reports from China today indicate that “multiple current and former executives of China Evergrande Group and its subsidiaries” have become embroiled in a government investigation into the company’s collapse, further unsettling Chinese property shares.

The price of iron ore and leading developers’ share prices in Hong Kong fell, along with a 1.82% drop in the Hang Seng Index upon hearing the news.

Today, when trading resumes, Hong Kong-listed developer shares, the broader index, and Singapore’s iron ore price (the SGX futures price) are likely to face increased pressure.

According to the Caixin business magazine, the investigation is examining whether the beleaguered property conglomerate violated rules regarding the use of funds.

“Xia Haijun, an ex-CEO of the group, and Pan Darong, a previous chief financial officer, have been detained by Chinese mainland authorities,” the magazine reported. Both were responsible for the property giant’s financial operations and resigned in July 2022 due to their alleged involvement in a bank deposit scandal.

This scandal involved banks unexpectedly seizing 13.4 billion yuan ($US2 billion) of the subsidiary’s deposits in late 2021. The investigation revealed that several Evergrande Property Services Group Ltd. subsidiaries had used the deposits as collateral for loans obtained by third-party firms from banks between March and August 2021, causing Evergrande to lose its deposits and $US2 billion in liquidity, ultimately pushing it toward collapse.

This Caixin-reported investigation appears separate from another investigation in Shenzhen, which led to the detention of executives from an Evergrande financial services subsidiary over the weekend. It also seems unrelated to another probe that forced Evergrande to halt its restructuring plans.

This latest development adds more pressure to Evergrande’s share prices, which fell in Hong Kong on Monday, as well as other struggling property groups and the price of the key commodity linked to property, iron ore. Iron ore prices slumped in Singapore, and Hong Kong-listed shares of embattled Chinese real estate firms, led by Evergrande, sold off after the company’s announcement that it had to delay a debt restructuring meeting.

The news about Oceanwide, a developer ordered to be wound up by a Bermuda court, further compounds the challenges faced by China’s property sector. This decision led to the biggest drops in Chinese property company shares in three months on Monday.

Evergrande’s US bankruptcy application linked to a debt restructuring in the High Court of Hong Kong and in the High Court of the Eastern Caribbean Supreme Court in the British Virgin Islands is now in jeopardy.

“Given the investigation into Hengda Real Estate Group Co Ltd, a principal subsidiary of the company, the group is unable to issue new notes under the present circumstances,” said Evergrande in a statement on Sunday.

Only last month, Hengda Real Estate announced an investigation by China’s securities regulator for suspected information disclosure violations. Police also detained some staff at its wealth management unit in Shenzhen.

Shares of other major Chinese property stocks in Hong Kong also fell, with the Hang Seng Index down 1.82% and the Hang Seng Mainland Properties index dropping just over 4% on Monday, while other real estate stocks took a hit. Country Garden’s shares were down 7.7%, Logan group lost almost 8%, and R&F properties saw a 6.6% decline.

Evergrande shares traded as low as 41 Hong Kong cents on Monday and ended at 43 HK cents.

In Singapore, SGX futures prices for 62% Fe iron ore delivered to northern China dropped more than 4%, ending at $116.15 a tonne from $US121.18 a tonne at Friday’s close.

Meetings for creditors to vote on the Hong Kong scheme have been postponed to September 25-26, 2023, to provide creditors more time to consider, understand, and evaluate the proposals. Evergrande requires approval from more than 75% of each debt class’s holders for the plan, which offers creditors various options to swap debt for new bonds and equity-linked instruments backed by its stocks and those of its Hong Kong-listed units.

Evergrande’s debt situation remains dire, with over $US300 billion in debt, onshore and offshore, and Hengda Real Estate’s unpaid debts totaling about 277.5 billion yuan ($US38 billion) as of the end of July, along with 1,931 pending litigation cases.

The company had already reported losses of $US81 billion in 2021 and 2022, and it appears that this figure will only increase in 2023. Evergrande’s latest filing indicates that its sales have not met expectations since announcing its March 22 debt restructuring plan, leading the company to consider reassessing the terms of the proposed restructuring.

This delay and uncertainty also cast doubt on Evergrande’s August announcement that it had filed for Chapter 15 bankruptcy protection in the US as part of its offshore debt restructuring.

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