China Evergrande Shares Soar On Trading Resumption In Hong Kong, Sparking Bailout Speculation

Shares of Hong Kong property developer China Evergrande Group Limited EGRNF surged after it resumed trading in Hong Kong Tuesday morning, buoyed by speculative bets in an otherwise down market. The company was trading up 15% mid-morning at HK$0.37, after touching highs of HK$0.45 per share on the open.

China Evergrande applied to the Hong Kong Stock Exchange to resume trading Monday night, saying that there was no material information it had to disclose other than what has been reported in the media already.

Evergrande’s real estate subsidiary China Evergrande Property Services Group Ltd also resumed trading Tuesday. After popping up 20% the shares had fallen back by 3% mid-morning in Hong Kong.  

Last week’s suspension from trading was Evergrande’s second suspension in an 18-month period. In August, shares in the property giant resumed trading on the Hang Seng after a 17-month suspension as a result of the company’s creditor problems.

Analysts cautioned that the big price pop was not based on any fundamental news but rather on speculators driving up the price of the shares.

“Looks like the gains are driven by speculative money,” Willer Chen, senior research analyst at Forsyth Barr Asia Ltd, told Bloomberg. “With this volatility, I really don’t know if there’s any chance for any proper investor to make money on this name.”

Around the market, traders chimed in with similar observations.

“Its either pump and dump or insider trading. Is a bail out coming?” observed one market watcher at the South China Morning Post website.

Speculation as to whether the Chinese government will step in to bail out beleaguered property firms has risen recently around trading desks since 80% of Chinese households currently invest around a third of their savings in domestic property. Economists point out that while a bailout would be positive for shares of Chinese property developers, it would also amp up the risk-on appetite of businesses in the world’s second-largest economy. The Chinese government reportedly has around $500 billion on hand to assist developers if required.

China Evergrande is China’s fourth-largest property developer and widely viewed right now as a significant proxy for the Chinese real estate market, which is suffering from a credit rout the full extent of which is little-understood.

Multi-billion-dollar bond defaults have made for volatile market activity in Evergrande so far over the past month. Evergrande was initially trading at HK$1.65 when it was suspended in March 2022. The shares then resumed trading in August this year at HK$0.35, rising quickly to around HK$0.75. After that, Evergrande shares fell back sharply after the company missed more payment deadlines for principle and interest notes. Today’s trading activity represents the latest chapter in the embattled developer’s ongoing fight for its life.

Evergrande’s EV maker subsidiary China Evergrande New Energy Vehicle Group Ltd was not allowed to resume trading.

The chairman of China Evergrande is currently under police surveillance in China, while its former CEO and former CFO have been questioned by police as a result of an investigation into practices at the company’s wealth management division.

Part of the problem that investors have in assessing the likelihood of Evergrande’s prospects going forward is that its future is highly contingent on the decision reached by a group of secret creditors who hold $15 billion of offshore bonds.

The creditors, who have been broadly labelled thus far only as “Class C” creditors by Evergrande, were due to meet with the company on September 25 to try and reach an agreement to restructure the company’s delinquent debt after Chinese authorities prevented it from issuing additional convertible debt. Convertible debt would have allowed Evergrande to restructure a sizeable portion of its $328 billion in liabilities into new shares of common stock, but was taken off the table as an option by regulators.

Evergrande abruptly cancelled the crucial creditor meeting just days before it was scheduled to go ahead, sending its shares into freefall. Last week, the shares were suspended from trading before resuming trading Tuesday morning.

The story underlines the frequently opaque nature of China real estate debt issuances, which has made investors in Hong Kong and China nervous about the underlying state of the domestic real estate market.

Evergrande’s bullish performance stood out in an otherwise down market, with incumbents Country Garden Holdings Company Limited CTRYY off 4.4% and Longfor Group Holdings Limited LNGPF 5% lower in the morning session. Sunac China Holdings Limited plunged 12%.

Hong Kong’s Hang Seng Index was lower 3% at 17,278 points Tuesday morning, while China’s CSI 300 Index was flat at 3,690 points.