(Bloomberg) --

China’s housing regulator has stepped up oversight of China Evergrande Group’s bank accounts to ensure funds are used to complete housing projects and not diverted to pay creditors.

The Ministry of Housing and Urban-Rural Development instructed local subsidiaries across China last month to supervise funds for Evergrande’s property projects in special escrow accounts, according to people familiar with the plan who declined to be identified discussing private matters. Evergrande and the housing ministry didn’t immediately respond to requests for comment. 

Under the heightened oversight, the developer’s funds must first be used for construction to ensure project delivery, the people said. Cash payments from these government-supervised accounts, such as paying suppliers, will be subject to state approval, they said. Local bureaus in some cities have already started to implement the measures, the people said. 

The moves are another sign that homeowners come first on Beijing’s priority list for managing the Evergrande crisis even as bondholders, banks and other creditors seek repayments on more than $300 billion in liabilities from the world’s most indebted developer.

 

The cash-strapped firm has kept bond investors on edge by not making any announcement on whether it met a Thursday deadline to make an $83.5 million coupon payment on a bond maturing in March. Asia’s largest issuer of junk-rated dollar bonds has so far made no stock exchange filing or public comment about the coupon. Three holders of the note told Bloomberg they haven’t received payment. 

The bank account restrictions underscore that policymakers are taking a more active role in the turmoil as missed payments by Evergrande on investment products spark protests across the country. Evergrande’s stock and bonds have tumbled in recent months on concern that the massive debt pile will lead to one of the largest restructurings ever in China.

Chinese developers sell residential properties before construction is completed, but are required to deposit funds from these sales in supervised bank accounts. That’s to prevent cash-strapped builders from abandoning projects or directing funds for other uses.

A Chinese city halted sales at two Evergrande projects in July, alleging the troubled developer misappropriated funds by only depositing a portion of the proceeds from housing sales into the escrow accounts, according to a local government statement.

New Account

To ensure Evergrande doesn’t divert these funds, the housing bureau in Nansha district created an escrow account under its own name this month to take in proceeds from Evergrande homebuyers, people familiar said, cutting off the developer’s direct access to the money.

A lack of funds has already led to a construction halt on some unfinished housing properties, sparking social unrest among buyers. In Guangzhou, buyers surrounded a local housing bureau earlier this month to demand Evergrande restart construction. 

Maintaining construction and project delivery is a focal point to resolve Evergrande’s liquidity crisis. In an effort to steer retail investors away from cash repayment on its wealth products, Evergrande is pushing them to accept deeply discounted properties, both to individuals and to companies. However, many of the projects aren’t finished. 

Evergrande owes about $147 billion in trade and other payables to suppliers, and received down payments on yet-to-be-completed properties from about 1.6 million homebuyers as of December.

Founding Chairman Hui Ka Yan has repeatedly emphasized the importance of completing housing projects. Only by fully resuming construction and sales can Evergrande ensure homebuyers’ rights, Hui told staff at a Wednesday meeting, the company said. 

Maintaining social order has always been paramount for the Communist Party, which has little tolerance for protests of any kind. Disgruntled retail investors gathered at the company’s Shenzhen headquarters for at least three straight days this month, and unconfirmed videos of protests against the developer in other parts of China have been shared widely online. 

Financial regulators in Beijing issued a broad set of instructions to Evergrande in a recent meeting, encouraging the developer to take all measures possible to avoid a near-term default on dollar bonds while focusing on completing unfinished properties and repaying individual investors.

 

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