By Scott Murdoch and Ziyi Tang
HONG KONG/BEIJING (Reuters) -China Evergrande Group's founder is being investigated over suspected "illegal crimes", the embattled developer said on Thursday, as creditors become increasingly concerned about the group's prospects amid an uncertain debt revamp plan and liquidation risk.
The world's most indebted property developer with more than $300 billion in total liabilities did not say whether Hui Ka Yan was still in a position to run the company, or what crimes he is being investigated for.
Trading in shares of the company was suspended earlier in the day after a report that its chairman had been placed under police watch. Evergrande said the shares will remain suspended until further notice.
"The Company hereby announces that the Company has received notification from relevant authorities that Mr. Hui Ka Yan ... has been subject to mandatory measures in accordance with the law due to suspicion of illegal crimes," Evergrande said.
The news signals for the first time that authorities could hold the billionaire Evergrande founder accountable for the developer's financial woes, which have ripped through the property sector that accounts for roughly a quarter of the Chinese economy.
Deepening turmoil in China's debt-laden property sector is threatening to undermine Beijing's efforts to get the sputtering economy back on more solid footing, and raising fears among investors of a spillover into the country's banking system.
The latest development is a major blow to China's once top-selling developer that has lurched from one crisis to another since its cash squeeze became public in 2021 and it defaulted on its offshore debt obligations later that year.
"It is unclear why Hui is under police surveillance, but it may signal certain negotiations demanded from the government. The latest development has disrupted the hope of restructuring," said Gary Ng, Asia Pacific senior economist at Natixis.
"No developer is too big to fail in China, and therefore it is hard to imagine a full bail-out. Still, when it comes to stability, it is possible to see more government influence in different ways," Ng added.
Evergrande has been working to get creditors' approval for restructuring its offshore debt. The process got complicated this week after Evergrande said it was unable to issue new debt due to an investigation into its main China unit.
The offshore debt restructuring plan now looks set to falter and the risks of the company being liquidated are rising, some analysts said.
Reuters reported on Tuesday that a major Evergrande offshore creditor group was planning to join a liquidation court petition filed against the developer if it does not submit a new debt revamp plan by the end of October.
Evergrande's problems have raised the prospect of an intervention by the Chinese authorities to manage any possible impact on the financial system and the broader economy, analysts said.
"They've managed to avoid the 'bottom line' of preventing a systemic crisis caused by one of the developers so far, and will almost certainly intervene further if Evergrande's situation appears likely to lead to contagion," said Christopher Beddor, deputy director of China research at Gavekal Dragonomics.
"But apart from that, their approach.. has often seemed conflicted and at times incoherent, and that continues today."
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Chinese media outlet Yicai, citing sources, said some other Evergrande executives were also being investigated.
Evergrande did not immediately respond to a Reuters request for comment outside Asia business hours.
The investigation into Hui, who founded Evergrande in 1996, is a remarkable fall from grace for the 64-year-old former steel technician, who just two years ago moved in power circles and exuded confidence about his business.
"At least it shows that the recent series of turmoil in Evergrande is not groundless," said Yan Yuejin, an analyst at the E-house China Research and Development Institution in Shanghai.
"We believe that Evergrande's debt turmoil has had a great turmoil and negative impact on the global economy, and the things behind it are not simple."
Evergrande's latest woes come against the backdrop of Beijing rolling out a raft of measures in the last few weeks, including cutting existing mortgage rates, to revive the battered property sector.
On Thursday, the finance ministry said China would exempt from taxes urban land used for affordable housing projects starting October. Buyers of such housing, and housing management firms, will also be exempt from stamp duties, the ministry said.
The recent regulatory easing may stabilize the housing market in the world's second-largest economy to some extent, analysts said, however, the appetite for buying property remains subdued in the weak economy.
"Still, the overhang of housing inventories in lower-tier cities facing population decline will persist for several years," Saxo Greater China Market Strategist Redmond Wong wrote in a research note.
"This will lead to more headlines about defaults, restructuring, and liquidation of insolvent developers, causing losses for shareholders, bondholders, banks, and investors in trust and wealth management products tied to property projects."