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China debt crunch

Key Evergrande backer Chinese Estates looks to dump stake

Shares rise 18% despite disclosure by second-biggest shareholder

Joseph Lau and wife Kimbie Chan, now chief executive of his company Chinese Estates, seen in 2017.    © AP

HONG KONG -- Embattled China Evergrande Group looks set to lose one of its top supporters in another sign of vanishing confidence in the world's most indebted property developer.

Chinese Estates Holdings and its leaders have been involved in almost every Evergrande fundraising since the latter's listing in Hong Kong in 2009. But in a filing on Thursday, the Hong Kong developer disclosed that it had sold 108.9 million Evergrande shares between Aug. 30 and Sept. 21 and said it would look at selling its remaining holding of 751.09 million shares, even though it could realize a loss of up to 9.5 billion Hong Kong dollars ($1.22 billion).

In a separate filing, Kimbie Chan Hoi-wan, Chinese Estates' chief executive, and husband Joseph Lau disclosed they had sold 24.44 million of their Evergrande shares, leaving them with 1.06 billion shares as of Sept. 10.

"The directors are cautious and concerned about the recent development of China Evergrande Group, including certain disclosures made by China Evergrande Group on its liquidity and going concern," said Chinese Estates in its exchange filing, adding that the share disposal would "provide an immediate liquidity to the group, and allow the group to reallocate the proceeds for other reinvestment opportunities when they arise."

Chinese Estates' holdings of Evergrande stocks and bonds accounted for 35.8% of its total assets as of Dec. 31 and the position caused the Hong Kong company to take a paper loss of HK$4.2 billion in its half-year results when it fell into the red. The combined Evergrande stake of Lau's family and Chinese Estates reached 14.6% as of last month. The bond holdings were not mentioned in Thursday's announcement.

Despite the disclosures, Evergrande shares climbed 17.6% on Thursday to HK$2.67 after going as high as HK$3 in early trade. This marked the stock's first positive move in almost two weeks amid a drumbeat of bad news. Chinese Estate's shares rose 5.5% to HK$2.30.

Work on more than half of Evergrande's development projects has been suspended due to failure to pay contractors and suppliers and its offices have been besieged in recent weeks by creditors, including staff and investors who bought the company's investment products and are owed 934 million yuan ($144.73 million) in back payments.

Evergrande Chairman Xu Jiayin, the only shareholder with a bigger stake in his company than the Lau's, told staff in a letter on Tuesday that the developer is confident it will meet its responsibilities to customers, investors and lenders.

Late on Wednesday, Xu said that the company would make it a top priority to help retail debt holders redeem their money. This came after the company had said it would make a coupon payment as scheduled on Thursday for a domestic bond. It did not mention a $83 million coupon payment due Thursday on an offshore bond.

A number of investors have increased their holdings on Evergrande bonds in recent months, including BlackRock, UBS and HSBC Holdings, according to data compiled by Morningstar.

The crisis at the company has roiled global markets with fears of contagion spreading across the $50 trillion Chinese financial system. Evergrande last month acknowledged for the first time it may default if it fails to attract investors or sell assets on time. It subsequently said it had not made "material progress" on either measure.

Indeed earlier this week, Hong Kong-listed China Strategic Holdings said it would seek shareholder approval to sell its entire 1.4% stake in Evergrande's listed electric vehicle unit, citing share price volatility. China Evergrande New Energy Vehicle Group, which has yet to sell a single car, has lost 90% of its market value this year.

Investors and analysts expect the government to step in and engineer an orderly exit where banks extend the term of loans to give Evergrande the runway to restructure. Some investors though are not ruling out a liquidation of the company.

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