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Trading Suspension & Financial Turbulence

HONG KONG – Shares of the beleaguered Chinese real estate developer, China Evergrande Group, were suspended from trading on Thursday, as announced by Hong Kong’s exchange. This comes in light of reports suggesting that the company’s chairman is under surveillance.

Bloomberg News reported that the chairman of Evergrande, Hui Ka Yan – also known as Xu Jiayin – has reportedly been placed under surveillance. This is yet another blow to the embattled company, whose shares were last noted at 32 Hong Kong cents on Wednesday.

Evergrande has seen its fair share of trading suspensions. Last year, in March, the company’s shares were suspended and only resumed trading on August 28, following a hiatus that lasted a staggering 17 months.

Dwindling Finances and Debt Woes

Financial troubles have been looming over Evergrande for a while now. Late Wednesday, the company revealed a loss attributable to its shareholders amounting to 33 billion yuan ($4.15 billion) for the six months ended June. The operating loss was cited at 11.72 billion yuan, which shows a decrease from the 39.36 billion yuan loss in the first half of 2022. Additionally, in July, Evergrande reported a combined net loss of $81 billion for 2021 and 2022, starkly contrasting their net profit of 8.1 billion yuan in 2020 – prior to their default.

Evergrande postponed a crucial debt restructuring meeting with its creditors earlier this month. The company cited in a filing that “the sales of the Group has not been as expected by the company” since the debt restructuring announcement in March. Consequently, Evergrande expressed the need to “re-assess the terms of the proposed restructuring to meet the company’s objective situation and the demand of the creditors.”

Statement on Chairman’s Surveillance

In a poignant statement issued on Thursday, Evergrande mentioned, “Mr. Hui has been subject to mandatory measures by the law due to suspicion of illegal crimes,” not divulging any further details on the matter.

From Humble Beginnings to Business Magnate

Hui Ka Yan’s journey from his humble beginnings, being born in 1958 during Mao Zedong’s Great Leap Forward campaign in Henan province, to establishing Evergrande in 1996, showcases his remarkable ascent in China’s business realm. He came to be celebrated as a figurehead for China’s affluence.

His nickname, “Belt Brother,” originated in 2012 when he sported a gold-buckled belt from Hermès during China’s annual legislative assembly. By 2017, his wealth skyrocketed, labeling him China’s richest person with a net worth of $42.5bn (£34bn). However, with Evergrande’s escalating issues, his fortune has taken a significant hit, and he has remained relatively out of the public eye in recent times.

Implications of Evergrande’s Collapse: Why It Matters

The fragility of China Evergrande Group isn’t just a worry for the company’s shareholders and management but holds serious implications for China’s economy, its people, and global financial markets.

Stakes for Property Buyers and Stakeholders

A primary concern lies with the numerous individuals who have bought properties from Evergrande, often committing their life savings even before the actual construction commenced. These prospective homeowners have advanced deposits now hanging in the balance. The fear of losing these deposits looms large if Evergrande declares bankruptcy.

Moreover, there’s a cascade of enterprises tethered to Evergrande’s fate. From construction companies, design entities, to materials suppliers, many stand on shaky ground, vulnerable to massive financial losses. This ripple effect could thrust several of these businesses into bankruptcy, exacerbating the unemployment problem.

Ramifications for China’s Financial System

Evergrande’s default could ripple through China’s banking and financial system. A default could engender reduced lending from banks and other financial entities. Such a scenario paves the way for a potential credit crunch, a situation where companies find it challenging to secure loans at feasible rates.

For the world’s second-largest economy, a credit crunch spells disaster. Companies deprived of borrowing capacity find their growth stymied. Some might even find it impossible to sustain operations.

Further, this precarious situation could dent the confidence of foreign investors, potentially deeming China as a less lucrative or stable destination for investments.

Evergrande’s Attempts at Damage Control

To navigate its tumultuous financial waters, Evergrande disclosed a loss of 581.9bn yuan ($79.6bn; £65.6bn) over the preceding two years in July. While the company had been devising a new repayment strategy, it appeared to be inching closer to a solution after filing for US bankruptcy protection.

Their latest proposition entailed reissuing its offshore debt as new bonds with a roughly decade repayment tenure. Additionally, offering creditors equity stakes in the company was also on the cards.

However, the path to resolution took a hit when Evergrande declared that its mainland subsidiary, Hengda Real Estate, had defaulted on a staggering 4 billion yuan debt. Subsequently, Chinese business wire Caixin unveiled that multiple current and erstwhile executives had been detained. Trading activities related to Evergrande’s other divisions, specifically property services and electric vehicles, were also halted on Thursday.

Lan Wang and Duncan Innes-Ker of Fitch Ratings stated, “China’s property-sector stress will continue to pose cross-sector credit risks in the near term.” They further commented on the government’s efforts, saying, “The government’s modest policy easing to date is unlikely to drive a sharp turnaround in homebuyers’ sentiment, even though it has led to some recent improvements in broader economic indicators.”

The road ahead for Evergrande remains fraught with challenges, and the ramifications of its potential downfall could reverberate across sectors and borders.

What is the nature of the business of Evergrande?

China Evergrande Group, colloquially known as Evergrande, has its foundational roots in the real estate sector. Established in Guangzhou in 1996, the company rapidly expanded its footprint, cementing its status as one of China’s foremost real estate developers.

Its vast portfolio spans across numerous cities in China, encompassing residential complexes, commercial ventures, and expansive housing projects. As urbanization rapidly advanced in China, Evergrande capitalized on the burgeoning demand for urban housing, making real estate its primary business.

Is Evergrande stock halal?

As usual, to determine the halal status of a stock, we will look at 3 main criteria:

  • Business Activity
  • Interest-bearing securities and assets
  • Interest-bearing debt

And there is a certain benchmark that these stocks have to pass in order to be considered Halal.

But, at the moment, we are not covering the compliance status of Evergrande, and if we do in the future, you will be definitely notified.

 

As an alternative to these stocks, here’s a list of stocks that you can have a look into:

list of stocks to replace evergrande

If you want to learn more about Islamic Finance-related topics, please visit our academy here.

Also, feel free to sign up for our free Halal stock screening service at musaffa.com

Disclaimer: Important information



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