China

Why the Evergrande-Shengjing Bank tie-up is a worrying sign

The marriage between a heavily-indebted real estate developer and a poor capitalised bank could be a bad example for other lenders to follow.

China Evergrande Group’s Rmb13.2 billion $1.9 billion investment in Shengjing Bank is touted as a key move for the property developer to tap into the financial sector. However, the seemingly straightforward transaction raises a host of potentially difficult questions for the Chinese economy.

The Chinese property giant announced last week that it intended to subscribe for 2.2 billion domestic shares in Shengjing Bank as part of the lender’s $2.6 billion fundraising programme.

Already the single-largest shareholder with a 17.3% stake, the investment would increase Evergrande’s interest to 36.4%, implying that it will having more voting power than all other domestic shareholders combined.

Post-transaction,...

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