A demolition order from authorities in the southern Chinese island of Hainan has plunged beleaguered property giant Evergrande into a fresh publicity crisis amid an investigation into the legality of a major project’s planning permits.
Trading of China Evergrande Group shares was suspended on Monday amid reports from local media that the Danzhou government had ordered the removal within 10 days of 39 apartment blocks on an artificial island in the seaside city after ruling that previous approvals were not valid.
Late on Monday, Hong Kong-listed Evergrande issued a statement confirming the reports and clarifying that the order would affect only a portion of the Ocean Flower Island project, without affecting 60,567 owners of finished apartments and 628 who had paid for unfinished homes.
Over the last 12 years, Evergrande has poured about $12.7 billion into creating on reclaimed land an archipelago of islands in a bay off the northwest coast of Hainan, a tropical island province in the South China Sea.
Whether the demolition would begin within 10 days depends on Evergrande’s response, an unidentified official responsible for oversight of the project told state-run National Business Daily. “If Evergrande applies for administrative reconsideration, then there is still a process to go through that will take some time,” the person said.
Evergrande shares resumed trading on Tuesday, rising by 8% before paring gains to finish just over 1% above Friday's closing price.
In recent months, the liquidity crisis at one of China’s largest real estate giants — with liabilities equal to about 2% of China’s gross domestic product — has repeatedly threatened to stall the country’s economic recovery and ripple through global financial markets.
In September, international markets panicked that Evergrande would be unable to pay off interest on its $300 billion debts. Fears of immediate contagion eased after creditors waived some payment obligations, while the group made others at the last minute.
Analysts rejected comparisons to the collapse of Lehman Brothers in 2008, instead describing Evergrande’s fate as a “controlled demolition” — part of the government’s campaign to get tough on risky borrowing.
But the crackdown is putting strains on a sector long dependent on debt-fueled building, which is responsible for about a quarter of GDP. Property accounts for the majority of urban household savings. In December, ratings agencies declared Evergrande's first official default, shortly after rival home builder Kaisa Group Holdings was given a similar rating.
Neither Evergrande nor Danzhou authorities revealed why the Ocean Flower Island apartments permits were revoked. But the project has faced scrutiny since 2017, when China’s central environmental inspection team found that it had damaged coral reefs and endangered the habitat of pearl oysters, a protected species. After a brief suspension, construction was allowed to continue.
But Hainan has since ramped up its ecological protection campaign. Sometimes likened to Hawaii for its beaches, tropical forest and nascent surf culture, the province has been at the forefront of efforts to enforce environmental zoning laws that have long been flaunted by real estate developers.
The artificial islands, shaped like the heart-shaped leaves of bougainvilleas, the provincial flower of Hainan (which is technically a vine), are monuments to the glitzy largesse of China's property developments during the boom years.
Larger than the palm islands in Dubai, the project is a dizzying blend of European, Asian, and futuristic buildings designed by international architects. As well as apartments, it includes an opera hall, luxury resorts, museums, and a theme park. (The development was ranked in 12th place in an annual survey of China’s ugliest real estate projects last year.)
The nationwide push to remove buildings that encroach upon “ecological red lines” comes from the top of the Chinese Communist Party. In 2019, villas built on protected land in central Shaanxi province’s Qinling mountains were demolished after local officials failed to act on repeated notes from President Xi Jinping demanding that the project be rectified.
In Hainan, the campaign has come alongside a political purge of officials who handed out contracts while turning a blind-eye to environmental checks. Many of those projects involved land reclamation off the island's coasts.
Zhang Qi, the former party secretary of Danzhou, was jailed for life in 2020 for taking bribes in exchange for construction project approvals. Included on his long rap-sheet was breaking up the approval process of Ocean Flower Island to skirt limits on the size of land reclamation projects.
For Evergrande, the failure to resolve environmental concerns over Ocean Flower Island adds to mounting political pressure as the firm faces joint liquidity and publicity crises. A group of about 100 investors protested outside the group’s headquarters on Tuesday, after the group announced reduced payments on its wealth management products, according to Reuters.