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Evergrande Sinks Deeper In Financial Morass

A project being developed by Evergrande in the Chinese city of Yuanyang

Lenders have taken control of about $2.1B in deposits of one of China Evergrande Group's subsidiaries in the latest blow to the beleaguered property developer. The company reported the seizure at the same time it said it wouldn't be able to publish its annual results before the deadline at the end of March.

“We just don’t have enough information to state categorically that the $2B is gone,” Travis Lundy, a Hong Kong-based analyst, told the Wall Street Journal

It is possible that the funds are merely frozen as creditors figure out the status of the debt guaranteed by the subsidiary, Lundy said, or the banks might be in full possession of the money.

Evergrande has been in dire financial straits for months, the result of amassed debt. A deal to sell a majority of Evergrande's property management unit for $2.6B to another developer, Hopson Development Holdings, which presumably would have shored up Evergrande's financial condition, fell apart in October.

In December, Fitch Ratings downgraded the long-term debt of Shenzhen-based Evergrande, along with two of its subsidiaries, to restricted default, meaning they failed to meet their financial obligations.

On Monday, Evergrande suspended trading in its stock in Hong Kong, as well as that of its two main subsidiaries. 

As the company faces pressure from bondholders and creditors, more asset sales are expected, Bloomberg reports, noting that Evergrande is reportedly preparing to sell its 30% stake in a Nanjing property company to Avic Trust Co. 

Debt defaults by Evergrande have had a rippling impact on other Chinese real estate developers as liquidity declines in the sector, necessitating asset sales around the world. Chinese property giant R&F said it would sell Vauxhall Square in the UK, a site with consent for 1.4M SF of residential and offices, for a loss of £69M.

The slow-motion collapse of Evergrande, along with troubles in the rest of the Chinese real estate sector, might impact the rest of the world. That includes the U.S. economy and property markets because of the size of China’s trade linkages with the rest of the world, the Federal Reserve warns.

"In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group," the Fed's biennial Financial Stability Report said in November.