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Thursday, December 2, 2021

Investigating Evergrande’s connection with regional banks poses a new threat

China’s top banking regulator will complete an investigation into the relationship between Evergrande and a little-known regional bank in China, which may pose a new threat to the world’s most indebted real estate group and its billionaire founder Xu Jiaren.

Chinese media reported in May that the China Banking and Insurance Regulatory Commission (CBIRC), China’s top banking regulator, is reviewing more than RMB 100 billion (US$15.6 billion) in transactions involving the Shenzhen-based developer and the Hong Kong The listed bank Shengjing Bank. It is partially owned. According to two people familiar with the matter, the investigation is nearing completion.

People familiar with the matter added that the regulator carefully reviewed how the bank was exposed to Evergrande’s debt and Xu’s role in corporate relations. Chinese media reported that regulators have been focusing on transactions involving Evergrande and Shengjing, in which developers own a large number of shares.

A person familiar with the investigation said that both Shengjing and Evergrande appear to have potential regulatory violations that exceed the threshold of allowable debt owed by a single borrower.

Repeated calls to Shengjing Bank and e-mails seeking comment did not get a response.

Evergrande did not respond to a request for comment about the company or Hui.

The investigation by the Chinese banking regulator covers a period of major turbulence in Evergrande, where the company was caught in a liquidity crisis that shook the global market. The developer’s plight has also raised doubts about the health of the broader real estate industry that underpins China’s economic growth model.

As Beijing faces one of the largest debt restructurings in China’s history, with Evergrande’s total liabilities exceeding US$300 billion, the efforts of regulators have become more important.

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The developer announced at the end of September that it would sell a 20% stake in Shengjing Bank to a financial group owned by the local authorities in the northeastern city of Shenyang for US$1.5 billion. This transaction is part of Evergrande’s rush to sell assets a few days after missing a large interest on an offshore bond.

Evergrande stated at the time that the equity sale was to release capital and solve the “adverse impact” of its liquidity problems on the bank.

But it added in the same regulatory document that Shengjing had requested that the net proceeds be used to repay Evergrande’s debt to the bank, raising questions about whether the developer relied on part of its own business for financing.

China United Credit Ratings, a Beijing-based rating agency, said in a July report that Shengjing Bank “has broken through regulatory restrictions and needs continuous attention”, adding that it “has a large exposure to anonymous customers”.

The issues mentioned in the report include loans provided by Shengjing Bank to “related party borrowers,” which may include shareholders. It did not name the borrower.

Evergrande’s sale of part of Shengjing’s equity also attracted the attention of international bondholder groups. Bondholders’ advisers told them last month that using the proceeds to repay another lender may amount to “preferential treatment” when it is not clear whether it will be repaid.

Evergrande moved the funds in late October before the end of the grace period, narrowly avoiding default, but today faces another such deadline.

Since the initial report of the investigation, the price of Evergrande bonds has lost most of its value. Developers subsequently faced a series of setbacks, including project delays and unpaid bonds, which highlighted the fragility of the industry.

Other Chinese developers including Sony, Fantasia and Hyundai Land also defaulted on bond payments. The real estate company Kaisa, a big borrower in the international bond market, begged “patient” this week as it tried to raise cash from asset sales.

Mr. Xu, who was once the richest man in China, has been committed to selling assets to raise cash and avoid official defaults. But the divestment of Shengjing Bank is the only major transaction completed in recent months.

When Beijing’s exact role in determining Evergrande’s future is unclear, the purchase of shares by state investors is also the most obvious sign of government involvement.

In some previous cases, concerns about connections between individuals, companies, and banks have led the state to take action. Baoshang Bank was taken over by the government after its collapse in 2019 due to excessive lending to companies controlled by Tomorrow Group, a financial and investment group led by billionaire financier Xiao Jianhua, who also holds a large number of shares in the bank . Xiao disappeared after being kidnapped by Chinese security personnel in a suite in Hong Kong in 2017.

Shen Meng, director of Chanson & Co, a boutique investment bank based in Beijing, warned that some Chinese banks controlled by private companies appeared to be forced to issue large loans to their private shareholders.

He said that for Chinese companies facing high liquidity requirements, especially private real estate developers, buying shares in commercial banks has become an important “flexible” solution.

But this partnership poses a “hidden danger,” Shen added, allowing shareholders to use low-cost credit for large-scale expansion, or to use banks to expand credit in the face of a tightening business environment.

The China Banking and Insurance Regulatory Commission issued new measures in June to strengthen supervision of bank controlling shareholders.

However, Alicia García Herrero, chief economist for the Asia-Pacific region of French investment bank Natixis, said that after the collapse of Baoshang Bank, banking regulators could have acted faster and ordered more Equity holders of small banks-which is an important reason for related party risk-divest assets.

“This lesson has not been fully learned… It seems that it has not been completed yet,” she said.

Sherry Fei Ju in Beijing, Sun Yu in Shanghai, Primrose Riordan and Thomas Hale in Hong Kong, and Edward White in Seoul

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