Chinese Police Detain Evergrande Wealth Staff Amid Financial Troubles

Chinese authorities have detained several staff members of Evergrande’s wealth management unit following the company’s failure to repay investors. This marks the first criminal investigation against the embattled property developer since it faced a massive debt crisis in late 2021.

Shares of Evergrande plummeted by as much as 26% in Hong Kong on Monday, although they later recovered most of their losses to close 1.6% lower.

The detention of Evergrande Wealth employees by police in Shenzhen, where Evergrande is headquartered, was announced in a statement on Saturday. Evergrande Wealth has been responsible for raising funds for its parent company from individual and corporate investors as part of China’s “shadow banking” sector since its establishment in 2015.

Shadow lenders, including trust firms, operate outside the formal banking system and are lightly regulated. They play a significant role in China’s financial sector by channelling money into high-yield investments.

China’s economic challenges have led to the failure of some shadow lending firms and losses for others, raising concerns about the possibility of a larger financial crisis.

In response to the detentions, Shenzhen police encouraged Evergrande investors to provide information. The police statement identified one detainee with the surname “Du” but did not disclose further details about the timing of the detentions or the specific allegations.

The Shenzhen government’s press office provided additional information, stating that Evergrande Wealth is suspected of engaging in “illegal fundraising.” According to publicly available information, the company and related parties allegedly collected funds to form an internal fund pool, violated contracts, and mismatched product investment directions and deadlines, resulting in losses for investors.

The police action is intended to establish a criminal case promptly, which could aid in recovering damages and potentially reducing investor losses. The statement noted that the detention of Evergrande employees would have a positive impact on regulating and stabilizing the financial market.

Evergrande, once one of China’s largest property developers by sales, has faced severe financial challenges due to its significant debt levels. The company’s debt issues came to a head in December 2021 when it defaulted on its debt, triggering a major property crisis in China.

In addition to bank loans and bonds, Evergrande’s wealth unit had raised funds through the loosely regulated shadow banking market, including trusts and wealth management products. As of last month, the total amount raised through such financial products was 92.1 billion yuan ($12.6 billion), with 34 billion yuan ($4.7 billion) remaining unpaid by the end of 2021.

Evergrande’s financial troubles became widely known in August 2021 when it halted the issuance of financial products due to difficulties in repaying them. Subsequently, investors protested at Evergrande’s headquarters and other locations, demanding repayment.

To address its creditors, Evergrande Wealth proposed several repayment plans, including a monthly payment plan. However, the unit issued apologies in May and August, admitting it could not meet its repayment obligations due to insufficient funds.

The broader Evergrande Group is currently undergoing a government-guided debt restructuring process initiated in late 2021 after its default. The company recently delayed a decision on offshore debt restructuring to October.

As of June, Evergrande reported total liabilities of 2.39 trillion yuan ($328 billion), indicating that it continues to face significant financial challenges despite recent developments.