From Evergrande to Nevergrande?

Troubles are growing for Chinese property development giant Evergrande. Last Thursday, trading of the company’s shares and those of two subsidiaries was suspended, and authorities accused Evergrande Chairman Hui Ka Yan of “illegal crimes.” Evergrande’s stock price has now plunged by 99% from its peak amid concerns that the company will not be able to restructure and repay its $300 billion debt after filing for bankruptcy protection in August.

Observers believe Hui’s lavish lifestyle – he flaunted a yacht, jets, and an estimated $42.5 billion fortune – displeased President Xi Jinping as Evergrande’s financial woes damaged China’s economy and created potential for social unrest.

This past year, thousands of Evergrande purchasers stopped paying their mortgages, while others organized protests as the embattled company paused construction on hundreds of projects. Multigenerational families who pooled their savings to buy property fear being left “with nothing” while young couples are delaying home purchases. They are not just angry with Evergande, but with the government they believe allowed this crisis to happen. Hence, Beijing is cracking down.

What’s next? Evergrande has been trying to get creditors' approval to restructure offshore debt worth $31.7 billion. Due to the regulatory investigation announced last week, it cannot issue new debt, putting those plans in jeopardy. A major group of Evergrande offshore bondholders now plan to join a liquidation petition, which will be heard in Hong Kong on Oct. 30, unless Evergrande can present a new restructuring plan before then.

Observers believe it is unlikely Beijing will intervene to prop up the company. But the government may move to liquidate Evergrande, as it has done with other failing businesses, though none on this large a scale. Such an action would take Evergrande’s debt down to zero, causing huge losses to its overseas lenders.