Shares in the highly indebted developer China Evergrande dropped following a court order freezing the bank deposits of one of its divisions, raising new concerns over the group’s financial health.
Evergrande’s Hong Kong-listed shares fell 16 per cent on Monday after traders digested an order from a court in Jiangsu province to freeze a Rmb132m ($20m) deposit held by mainland Chinese subsidiary Hengda Real Estate Group and another of its units.
While the court order was issued earlier in July, it did not start widely circulating among traders until the weekend.
The development is the latest sign of rising market nerves surrounding China’s most heavily indebted property developer, which has sought over the past year to reduce its leverage in the face of government curbs and heightened volatility in the prices of its stock and bonds.
Evergrande’s shares leapt 10 per cent on Friday after the company announced in a statement to Hong Kong’s stock exchange that its board would meet to discuss the first special dividend in three years.
The Jiangsu court order was made at the request of China Guangfa Bank, a commercial lender based in southern China.
“Overall, we view this as negative news, indicating weakening bank channels which should further pressure [the group’s] liquidity,” noted Iris Chen, a credit analyst at Nomura. She said the court order related to a disagreement over the early repayment of a loan.
In a statement on Monday, Evergrande said it had a Rmb132m loan with Guangfa Bank due in March 2022 and that it would sue the lender.
China’s biggest developers need to bring their borrowing in line with the “three red lines”, a government policy unveiled last summer that constrains their leverage according to three balance sheet metrics.
Evergrande has benefited from decades of urbanisation in China, which made its chair Hui Ka Yan the country’s richest man and also led to its liabilities ballooning. Last month, US agency Fitch downgraded Evergrande’s credit rating, citing the pressure to “downsize its business and reduce overall debt”.
The company is a large borrower on dollar-denominated bond markets, where the woes of state-owned bad debt manager Huarong and the default of developer China Fortune Land Development have generated unease this year and raised questions over the extent to which Beijing will support struggling issuers.
Evergrande does not have any public bond maturities remaining in 2021, Nomura noted.
Its bonds maturing in 2022 were flat at 85 cents on the dollar on Monday.
Evergrande has also been under intense market scrutiny for much of the last year because of its failure to list Hengda. That allowed investors, which included retailer Suning, to demand refunds for the Rmb130bn they had collectively put into the business. Most of them declined to ask for their money back, averting a cash crunch.
The developer has also embarked on a series of asset sales, including a $570m stake in an internet company in June and a property unit in the Chinese city of Hangzhou.