The chairman of China Evergrande Group, Hui Ka Yan, has reportedly come under police scrutiny, according to Bloomberg, further adding to the uncertainties surrounding the troubled developer’s future as it grapples with the increasing likelihood of liquidation.

Evergrande remains the world’s most heavily indebted property developer and has been at the epicentre of an unprecedented liquidity crisis in China’s property sector, constituting roughly a quarter of the world’s second-largest economy.

Once the top-selling developer in China, Evergrande’s financial crisis became public in 2021. Since then, it and a number of its peers have defaulted on their offshore debt obligations, amidst a decline in home sales and fewer opportunities for fundraising.

What lies ahead for Evergrande?

Evergrande has been actively seeking approval from its creditors to restructure offshore debt amounting to $31.7 billion (€30 billion), encompassing bonds, collateral, and repurchase obligations, given the weakening cash flows.

The proposed plan, presented in March of this year, includes various options for offshore creditors, including the conversion of some of their debt holdings into new bonds with maturities ranging from 10 to 12 years.

However, a recent announcement over the weekend, stating an inability to issue new debt due to an ongoing regulatory investigation into one of its main Chinese units, has disrupted these plans.

A significant group of Evergrande’s offshore bondholders intends to join a liquidation petition slated to be heard in Hong Kong on 30th October, unless Evergrande can present a new restructuring plan before that date.

Government intervention to support Evergrande and provide immediate liquidity is unlikely. While liquidation remains a possibility, it could be the worst-case scenario for Evergrande, as the company would cease to exist and its debt would be written down to zero, with far-reaching implications for its lenders.

In such a scenario, offshore bondholders would retain the ability to pursue claims against the company’s executives, officers, and offshore assets, offering them some avenue to recover a portion of their lost investment.

What will happen to Hui Ka Yan now?

Hui founded Evergrande in Guangzhou in 1996 and took the company public in Hong Kong in 2009. The company experienced rapid growth through an aggressive land acquisition strategy supported by loans and by swiftly selling apartments at slim profit margins.

However, Evergrande’s liabilities swelled to over $330 billion (€312 billion), and the company came under immense pressure as China’s property market weakened after a government crackdown on debt-fuelled building expansion.

The structure of Evergrande and its operational practices under Hui’s leadership has come under scrutiny as the property empire began to unravel amidst increasing pressure to meet repayment obligations and complete apartment construction.

Bloomberg News, citing sources, reported that Hui was taken into police custody earlier this month and is currently under surveillance at a designated location.

This development follows an earlier announcement by police in southern China that they had detained some staff from Evergrande’s wealth management unit, which raised funds from individual investors through the sale of investment products.

These actions by the police suggest that Hui may not remain at the helm of the company for much longer. However, it remains unclear who would succeed him, or if the government would have any involvement in the company’s management.

How did Evergrande gain such public attention?

Evergrande’s meteoric growth propelled it to become one of China’s largest and most profitable property developers, with sales totaling $110 billion (€104.2 billion) in 2020. Its subsequent fall from grace has been equally striking.

During its peak, the developer’s rapid borrowing spree made it the largest dollar bond issuer in the sector. After missing several bond payments in late 2021, the company’s entire offshore debt was classified as in default, leading creditors to grapple with a resolution.

Evergrande’s decline began to infect the broader Chinese property sector as credit conditions worsened, and rival developers found themselves struggling, with some forced into default.

Has China attempted to regulate?

After maintaining silence on the Evergrande crisis in 2021, a central bank official in October of that year attributed the company’s troubles to its poor operational and management practices. The official stated that Evergrande had “blindly diversified and expanded its business.”

As the crisis escalated, a risk-management committee was established at the developer in December 2021, which included officials from state-owned companies to assist in its debt and asset restructuring. Shortly thereafter, authorities moved swiftly to reassure markets that risks to the property sector and economy were manageable.

While direct state support for Evergrande remains uncertain, Beijing has implemented a series of measures over the past year to bolster the property sector, prioritizing the completion of unfinished homes for developers.