Liu Yongzhuo, vice chairman and an executive director of China Evergrande New Energy Vehicle, has been detained in China on suspicion of illegal activities. This news, announced to the Hong Kong Stock Exchange, caused the company’s shares to sink by 6%.
Evergrande ventured into the EV business in 2019 as part of its diversification strategy, has reported significant cumulative losses in this sector. As of the end of 2022, these losses amounted to a substantial figure, reflecting the challenges the company faces in this new venture.
The company’s chair was placed under “mandatory measures” over illegal activities, a term that implies residential surveillance or detention by officials. This adds to the company’s woes, as does the detention of employees from its wealth management subsidiary.
The lack of detailed information about these allegations and the current status of the company’s founder, who was once considered the richest person in China, adds to the uncertainty surrounding the company.
The financial strain on the company is evident in its dealings with creditors. In recent court proceedings, the company proposed issuing “certificates” to creditors, which are neither shares nor bonds but rights to distribution based on certain assets. This proposal indicates the company’s efforts to negotiate with creditors amidst its financial difficulties.
This situation is further complicated by the company’s earlier restructuring plan, which was rebuffed by investors. The plan involved issuing new bonds and swapping some offshore debt with stakes in its EV unit and a Hong Kong-listed affiliate.
However, this proposal was derailed due to an investigation by authorities over alleged breaches of disclosure rules. A Hong Kong court is set to hold a hearing on Evergrande’s debt restructuring plans, with the possibility of liquidation if creditors reject the scheme.
Moreover, the property sector in China shows fresh signs of distress with the bankruptcy liquidation of Zhongzhi Enterprise Group, a major shadow bank in China. Zhongzhi, which lent billions to property developers including Evergrande, filed for bankruptcy after failing to pay its debts. This development is a significant indicator of the ongoing challenges in China’s property market, which has been struggling due to a crackdown on excessive borrowing that began several years ago.
Additionally, the situation is complicated by the broader context of China’s economic landscape. The property industry meltdown has had a ripple effect, impacting financial markets and causing share prices to fall in Hong Kong and Shanghai. The Hang Seng index, for instance, was down by 1.9%, with Evergrande Group’s shares losing 1.8%. These market reactions underscore the interconnectedness of various sectors within China’s economy and the potential for broader economic implications.
Furthermore, the troubles at Evergrande’s EV unit could complicate the company’s restructuring efforts. Some of these plans involve asset swaps within the group, but the detention of a key executive and the company’s delayed manufacturing plans due to funding issues add layers of complexity to the situation.
The situation with Zhongzhi Enterprise Group further highlights the challenges in China’s financial sector. The company, one of China’s largest private asset management companies, faced a severe shortage of working capital and was unable to recover most of its accounts receivable. This bankruptcy reflects the difficulties faced by shadow banks in China, which operate outside traditional banking regulations and have been crucial in financing the property sector.
These developments in China’s property and technology sectors are significant not only for the domestic market but also for the global economy. The challenges faced by major companies like Evergrande and the ripple effects on financial markets underscore the interconnectedness of global economic systems. As China continues to grapple with these issues, the implications for international investors and businesses will be closely watched.
