Thursday, October 21, 2021

China’s bankruptcy law takes a serious toll on bankruptcies

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Written by By Jane C. Timm, CNN

Embattled Evergrande Group, China’s largest property developer, recently emerged from its biggest creditor, Peking Capital, with a $15 billion deal to take on $8 billion in debts.

But Evergrande’s troubles are far from over. As the first ever bankruptcy of a Chinese company, it’s opened up a Pandora’s box of other potential shambles

“Before Evergrande’s collapse in 2014, private sector Chinese companies had really been able to operate on their own and do pretty well,” said Christopher Lalla, a financial advisor and China expert with Bank of America Merrill Lynch, in an email interview.

“There were a lot of people who were watching China like ‘the big question is whether this ends well.'”

One in 50 corporate executives in China were planning to turn themselves in

A recent report from KPMG found that at least 50% of Chinese corporate executives planned to turn themselves in to authorities, if the financial situation of their company worsened.

A key challenge for China’s banking system is the increased risk associated with distressed financials, said Lalla.

Evergrande’s problems began to escalate in March 2017, when fraud-riddled property developer Sunac China Holdings disclosed in a Hong Kong filing that the developer had overstated revenue by nearly $1 billion.

Evergrande Group’s record is now even more disastrous

Soon after, the regulatory authorities began investigating Evergrande’s financials, and issued a freeze on its operations.

China’s stock markets took a bloodbath on March 27, and Evergrande announced that it planned to restructure in a bid to bolster its finances.

But shareholders were not impressed by the plan. (By July, Evergrande’s shares had dived 86%, wiping off over $12 billion in market value).

China’s top watchdog just suspended trading in 18 companies

The company’s troubles went from bad to worse.

In September, Evergrande admitted that it’d been overcharging customers by 20%, adding up to over $5.5 billion.

It was also found that the company had falsified contracts, with its own board of directors, under the watch of then-chairman Hui Ka Yan.

Less than two months later, the billionaire chairman had to step down from his role.

And on April 4, Evergrande fired the company’s chief executive officer Han Yue, amid allegations that he was involved in the drafting of a scam in Hong Kong.

Han is not the only executive, however, who has fallen.

Former CFO Wang Yilin and board member Ha Cui, both of whom quit over allegations of fraud, are being questioned by Beijing police. The company has also been hit by a wave of shareholder lawsuits.

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