Hong Kong’s audit watchdog expands probe into embattled China Evergrande’s property services unit

Hong Kong’s audit regulator will look into 13.4 billion yuan of deposits the subsidiary used to back several loans
The investigation will also cover the audit work carried out by PwC on the company’s 2020 annual accounts

China Evergrande Group

Georgina Lee

Published: 8:05pm, 15 Aug 2022

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Hong Kong’s audit regulator has expanded its probe into the property services arm of embattled developer China Evergrande to look into 13.4 billion yuan of deposits the subsidiary used to back several loans, later revealed to have been channelled to its parent.

The Financial Reporting Council (FRC) said in relation to the 13.4 billion yuan deposits used as pledge guarantees by Evergrande Property Services, disclosed by China Evergrande in an exchange filing last month, the inquiry will scrutinise the financial statements of Evergrande Property Services for the financial year ended December 2020, and the six-month period ended June 2021.

The investigation will also cover the audit work carried out by PwC on the company’s 2020 annual accounts, the FRC said in a press release issued on Monday. PwC said it does not comment on client matters when asked by the Post about the FRC’s investigation.

“The FRC publicly announces the initiation or extension of the scope of investigations when considered necessary in the circumstances in order to protect the interests of shareholders and the investing public,” it said in the statement Monday.

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The announcement is also intended to “maintain public confidence in our financial markets and independent auditor regulation,” it said. The watchdog had previously only announced the results of its investigations.

China Evergrande Group, which is facing calls for liquidation from creditors as it stumbles under a US$300 million mountain of liabilities, had said in a July filing that an independent investigation had found that the bank deposits in question were provided by its 60-per cent owned Evergrande Property Services, as guarantees for loans borrowed by third parties, but were then diverted back to China Evergrande for general operations.

The loan guarantees were made between December 2020 and August 2021 as the world’s most indebted developer faced a cash crunch. Several of the loans were not repaid and the deposits seized by creditors.

On Monday, the FRC said it has expanded the scope of an earlier round of investigations, under way since late last year, to look at concerns over the financial statements of China Evergrande over the same period, and the audit work done by PwC on the group’s 2020 annual accounts.

The probes by Hong Kong regulators will likely be watched closely by overseas bondholders and creditors of the debt-ravaged property developer. Last month Evergrande outlined what it called “preliminary principles” for restructuring its offshore debt, saying that it will arrange asset packages, which may include shares of China Evergrande New Energy Vehicle Group and Evergrande Property Services.

The developer is seeking to buy time from creditors for a more detailed debt workout plan expected later this year, without giving specifics. The financial health of Evergrande and other property developers has been a major concern for investors over the past year, in part because of the large role the property market plays in China’s economy.

Evergrande dangles sweeteners for time to deliver its debt workout

Evergrande in December failed to pay the interest on US$645 million and US$590 million of junk bonds, even after a grace period, triggering a cross-default on its other borrowings. The firm has not published its accounts since the June 2021 interim report, when it disclosed 1.97 trillion (US$294 billion) of total liabilities.

Trading in the shares of Evergrande Property Services, which was listed on the main board in December 2020, has been suspended since March.

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