Evergrande’s debt crisis is wreaking havoc on Hong Kong’s stock market

Shares of Evergrande Group plummeted 10% in Hong Kong on Monday, hitting just 2.28 Hong Kong dollars ($0.29) per share. The stock has shed 84% so far this year, plunging below its 2009 IPO price of 3.5 Hong Kong dollars ($0.45).

The Hang Seng Index (HSI) on Monday dropped 3.3%, suffering its worst decline in nearly two months, as Chinese banks, insurers and other real estate companies were slammed.
Evergrande is facing a few critical deadlines this week. It was supposed to repay interest on some bank loans on Monday, according to Bloomberg. The news outlet recently reported that Chinese authorities have told major banks that they won’t receive those payments.

Evergrande did not immediately respond to a request from CNN Business for comment about those payments.

And interest payments totaling more than $100 million are due later this week on two of the company’s bonds, according to data provider Refinitiv.

But it’s not clear how much — if any — of those debt obligations Evergrande will be able to meet. The group is China’s most indebted developer, with more than $300 billion worth of liabilities. Over the last few weeks, it’s warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly.

Evergrande’s debt burden is so large that analysts have warned that risks could spread throughout China. The company holds about 6.5% of the total debt held by China’s property sector, according to an estimate by UBS.

The Hang Seng Property Index, which tracks major developers listed in the city, sank 6.7%, hitting its lowest level since May 2016. The chill might have been exacerbated by a Reuters report late Friday afternoon, which cited anonymous sources as saying that Beijing has called on Hong Kong’s powerful property tycoons to pour resources and influence into backing Beijing’s interests.
Hong Kong developers New World Development (NDVLY) and Chinese Estates Holdings, well known as Evergrande’s long-time allies that often supported the company by buying its bonds or part of its stakes, fell 12.3% and 8.5%, respectively. Another Chinese property developer, Country Garden, lost more than 6%.
The sell-off spread to shares of Chinese banks and insurance companies. Ping An Insurance — the country’s largest insurer and one of its biggest property investors — slid nearly 6% on Monday to its lowest level since 2017. The heavy losses came even though Ping An said Friday that the company has “zero exposure” to Evergrande, while risks to its other property investments were “controllable,” according to Chinese state media.

Mainland Chinese stock and bond markets were shut Monday for a public holiday and will reopen on Wednesday.

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Goldman Sachs analysts warned of “rising risks” from the Chinese property market.

“Concerns over Evergrande are rising and signs of financing difficulties spreading to other developers are emerging,” they said in a research report published Sunday night. The Chinese government needs to “carefully manage” Evergrande’s potential default or restructuring, while delivering a clear message to help “shore up confidence and to stop the spillover effect,” they said.

Evergrande has about 200,000 employees, raked in more than $110 billion in sales last year and has more than 1,300 developments, according to the company. Its huge liabilities are widely held by financial institutions, retail investors, homebuyers and suppliers in the construction, materials and design industries.

Trouble at the heavily indebted property giant has been brewing for the past year. In August 2020, Beijing began containing the property sector’s excessive borrowing in an attempt to prevent the housing market from overheating and to curb debt growth.

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Evergrade’s liquidity crisis has intensified in recent weeks, triggering a further plunge in the company’s stocks and bonds.

Early last week, the Chinese media outlet Caixin reported that several hundred people who had invested in an Evergrande wealth management product surrounded the company’s Shenzhen headquarters, demanding their money back.

They also questioned a senior Evergrande executive, who they claimed had redeemed his investment several months ago, suggesting that he had known the extent of the company’s problems before telling investors.

The company on Friday warned that six of its executives could face “severe punishments” for cashing out early on the wealth management product. On Saturday, the company said it would start repaying its wealth management investors with real estate.

Washington is warning American firms about doing business in Hong Kong

US President Joe Biden on Thursday confirmed reports in various media outlets this week that his administration plans to soon issue an advisory to companies that will caution them of a “deteriorating” situation in the Chinese territory.

“The situation in Hong Kong is deteriorating, and the Chinese government is not keeping its commitment that it made, how it would deal with Hong Kong,” Biden told reporters at the White House on Thursday, referencing Beijing’s pledge to maintain the city’s semi-autonomous status for 50 years after its 1997 handover from Britain.

Biden described the announcement as “more of an advisory as to what may happen with Hong Kong,” without divulging more details, and experts believe it won’t go much beyond flagging the rising risks.

This won’t be the first time that Washington is urging caution about Hong Kong, which has undergone significant change since pro-democracy, anti-government protests roiled the city in 2019. China cracked down on Hong Kong last year by implementing a sweeping national security law that signaled Beijing is taking ever tighter control. The law raised questions about the city’s future as an international business center.

Following the passage of that law, former President Donald Trump revoked the United States’ special relationship with Hong Kong, which has in the past exempted the city from certain tariffs, among other privileges.
The US government also sanctioned several officials last year, including Hong Kong Chief Executive Carrie Lam, who later said she was forced to stockpile cash because the restrictions cut her off from the global banking system. (Reuters reported Thursday that Washington is preparing to impose financial sanctions on “a number of Chinese officials” over Hong Kong, citing two anonymous sources. CNN Business has reached out to the US State Department for comment.)

Biden’s business advisory “probably won’t pack an immediate punch,” according to Brock Silvers, chief investment officer for Hong Kong-based Adamas Asset Management. He added that “few US companies currently operating in Hong Kong will be surprised at its content or otherwise unaware of Hong Kong’s growing risks.”

But Silvers said that it does reflect an “increasingly contentious” relationship between China and the United States. Relations have been eroding for years as the two countries clash over everything from Hong Kong and Xinjiang to Big Data, trade and foreign investment.

American companies have also been treading carefully in Hong Kong for a while, too, as the distinction between operating there and in mainland China fades.

Apparel and footwear company VF Corp (VFC) announced in January that it would move Asia operations out of Hong Kong, relocating its supply hub to Singapore and establishing other services in Malaysia. It moved brand operations to Shanghai. The New York Times (NYT), meanwhile, moved its digital news operation for Asia from Hong Kong to Seoul.
Big Tech players have also expressed reservations: Facebook (FB), Google (GOOGL) and Twitter (TWTR) have paused the review of requests for user data from the city’s government.
Last month, the president of the American Chamber of Commerce in Hong Kong called the demise of the city’s pro-democracy tabloid Apple Daily a “shot across the bow” after its journalists were arrested and millions of dollars in assets were frozen. Authorities cited violations of the new national security law as their rationale for cracking down on the publication.
“It’s not just the closure of Apple Daily,” AmCham Hong Kong President Tara Joseph told CNN Business at the time. “It’s the new normal, and the change that Hong Kong is going through from its era as a post-British colony to an era where it is, more and more, part and parcel of China.”
The Hong Kong government has pushed back on such concerns. Lam told reporters last month not to accuse Hong Kong authorities of “using the national security law as a tool to suppress the media or to stifle the freedom of expression.” Officials have also defended the city’s status as a major financial hub, with the China Liaison Office in Hong Kong recently saying that its business environment had been stabilized.

The forthcoming announcement from the Biden administration is a “statement of the obvious,” according to William Reinsch, a trade expert at the Center for Strategic and International Studies who served for 15 years as president of the National Foreign Trade Council.

“‘One Country, Two Systems’ is dead,” he said, referring to the rule that has for more than 20 years afforded Hong Kong political and legal freedoms that are not available on the Chinese mainland.

“That makes it essentially a warning to US companies that the risk of being [in Hong Kong] has gone up significantly and puts the government in the position of being able to say, ‘We told you so,’ when something bad happens. And it will,” Reinsch added.

Apple Daily: Hong Kong’s biggest pro-democracy newspaper to close as Beijing tightens its grip

The news sent a deep chill through Hong Kong’s media industry and undermined government claims the new legislation would not diminish press freedom.

“But it still came as a shock when it happened,” said one journalist at the publication, who asked to remain anonymous out of security fears.

Since the law took effect, Apple Daily has been crippled bit by bit. Founder Jimmy Lai — already in jail for attending a pro-democracy rally — has been arrested and charged with colluding with foreign forces to endanger national security. Five of the newspaper’s top editors and executives have been accused of the same crime, apparently for using articles to call for foreign governments to sanction Hong Kong.

Hundreds of police officers have twice raided the publication’s newsroom, most recently seizing computers and materials — an alarming development for journalists and their sources in an increasingly sensitive environment. Several Apple Daily journalists had already quit before this month, saying the rewards of their work no longer outweighed the risk of imprisonment.

Even as official pressure piled on the newspaper, public support surged. Last Friday, after the arrest of its top editors, Apple Daily printed 500,000 copies which sold out.

Police officers raid  the Apple Daily office on June 17 in Hong Kong.
That wasn’t enough to counter a financial squeeze brought on by Hong Kong authorities. While Next Media told investors it had enough money to last 18 months from April, in recent days the paper’s bank accounts had been frozen.

On Wednesday, as the board met to discuss the paper’s future, police officers again descended on the newsroom arresting two more journalists. Hours later, the paper announced that after 26 years on newsstands, it would close its doors.

“A woman sent me a note a few days ago saying without Apple Daily she just doesn’t feel as safe as she used to with a free press as the protector of society,” said Mark Simon, one of Lai’s top advisers.

“They’re coming for everyone else soon.”

A critical voice

Jimmy Lai founded Apple Daily in 1995, channeling the wealth he’d accumulated as a textile tycoon into the Next Digital publishing operation. The mission of its centerpiece title, Apple Daily, was always clear: to criticize the Communist Party that Lai had fled mainland China from as a child.

The newspaper was a sensation, and its tabloid sensibilities quickly made it a market leader, giving Lai a huge platform to influence opinion in Hong Kong. The paper drove a paparazzi culture in the city, and at times attracted ire for its reporting methods. But it also tracked the wealth of mainland officials and their families in Hong Kong, and devoted ample resources to holding those in power to account.

An advertisement introducing the newspaper to the world made it clear Jimmy Lai knew the Apple Daily made him a target.

Beijing’s growing economic influence in the early 2000s meant that other outlets often avoided openly criticizing the Communist Party, mindful of commercial implications. Lai didn’t care. Apple Daily continued poking the bear, even if that meant major Hong Kong corporations such as Cathay Pacific or CK Hutchison Holdings never advertised with the publication.

The newspaper didn’t back down as the Communist Party under President Xi Jinping grew increasingly intolerant to any dissent — especially in its disputed or semi-autonomous territories such as Hong Kong, which after being handed back to China from Britain in 1997 was promised its own system of governance for 50 years.

That two-track setup led to a disconnect between how Hong Kongers expected to be governed and Beijing’s desire to control the city.

Lai was a key figure in a series of 2014 protests dubbed the Umbrella movement, which brought central Hong Kong to a standstill for months. His paper became a symbol of the opposition to Beijing’s plans for how Hong Kong’s leader would be selected.

When mass unrest erupted again in 2019, this time over a bill proposing extradition to China, Apple Daily’s front pages urged readers to attend huge marches, and printed anti-government posters for them to carry.

Copies of the Apple Daily newspaper -- paid for by a collection of pro-democracy district councillors -- sit on a cart before being handed out in Hong Kong on August 11, 2020, a day after authorities conducted a search of the newspaper's headquarters after the companys founder Jimmy Lai was arrested under the new National Security Law.

Anger in the city that year turned into the most serious violence Hong Kong had seen in decades: The city’s legislature was sacked, a dramatic 12-day siege unfolded at a university and the international airport was shut down, twice.

All that was too much for Beijing on Chinese soil. In June 2020, as pandemic restrictions thwarted the ability of Hong Kongers to protest, China passed the National Security Law.

In the 12 months since, nearly all pro-democracy politicians have either been jailed or have fled the territory. Apple Daily was the last major voice of the pro-democracy camp still at large.

Declining media freedoms

Apple Daily divided opinion in Hong Kong. It was loved by those who shared its liberal values and loathed by conservatives who accused it of causing chaos.

Still, its death has caused alarm about freedom of press in Hong Kong. On Tuesday, city leader Lam tried to dismiss those fears, saying that the police probe into Apple Daily was “unrelated to normal journalist work.”

Michael J. Abramowitz, president of NGO Freedom House railed against that sentiment.

“Treating independent, fact-based journalism as a threat to national security is an unacceptable attack on press freedom and comes amid a wider crackdown on freedom of expression and freedom of assembly in Hong Kong,” he said.

It is now unclear how Hong Kong’s mini-constitution — the Basic Law, which guarantees freedom of expression and the media — will operate alongside a national security law that sets increasingly narrower parameters for journalistic work.

The Apple Daily’s closure follows a slew of attacks on press freedom. The city’s police chief recently proposed an anti-fake news law; a journalist was convicted for an administrative error when investigating alleged police wrongdoing; and public broadcaster RTHK has seen its coverage squeezed.

Hong Kong media tycoon Jimmy Lai, founder and owner of Apple Daily newspaper is seen handcuffed and escorted by the guards leaving Lai Chi Kok Reception Centre on December 12, 2020, in Hong Kong, China.
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At the same time, there has been a clampdown on broader civil liberties. This year, Hong Kong’s annual Tiananmen Square vigil was not permitted to go ahead, ostensibly because of Covid restrictions, and potential attendees threatened with up to 12 months in jail.

In a sign of Hong Kong’s decreasing tolerance for political positions that diverge from those of Beijing, Taiwan announced it will remove all non-local staff from its office in the city. Taipei accused the Hong Kong government of demanding its Taiwanese staff sign a document acknowledging Beijing’s claim over the self-governing island as a prerequisite for visa renewals.

As newsstands open next week, they will be absent of the apple-bearing masthead that has been a staple for decades. Jimmy Lai remains in jail with no ability to advocate for the paper founded. In his mid-70s, it is debatable whether he will ever walk free in Hong Kong again.

“I never would have imagined it would come to this.” said Andrea Lo, a freelance journalist in Hong Kong. “Apple Daily is a huge part of everyday life for us as Hong Kongers, but not just because it has consistently been the biggest champion of the voice of the people. All of us find a lot of value in its coverage on everything from the pro-democracy protests, to real-time reports on incidents around Hong Kong.”

On Wednesday, grieving readers gathered outside the newspaper’s headquarters, holding placards, and bearing cards and flowers.

“I think people will miss the Apple Daily as a platform where they could speak freely and be critical of the government and Beijing,” said the Apple Daily newsroom staffer.

“Maybe some other media will become the substitute for us,” he added, doubtfully.

— Lauren Lau contributed to this report.