By Mike Bird and Xie Yu
China Evergrande Group said documents circulating online about a corporate restructuring involving a key subsidiary were fake, after they spurred a steep selloff in the Hong Kong-listed real-estate developer's bonds and shares.
Evergrande is China's largest property developer by contracted sales last year and Asia's largest junk-bond borrower. The h eavily indebted company is known for unconventional financial tactics and for venturing into other business lines such as electric vehicles.
The company's response to the documents came hours after the Hong Kong stock market closed on Thursday.
Evergrande's U.S. dollar bonds due January 2024 had earlier fallen from more than 93 cents on the dollar to be bid at less than 88 cents, according to Tradeweb, sending yields soaring to nearly 17%.
Its shares fell 5.6% to close at 15.22 Hong Kong dollars, the lowest since May. Stock in some other Hong Kong-listed developers also fell, but by a lesser extent, in a declining overall market. Kaisa Group Holdings dropped 4.2%.
Evergrande said it had reported the case to the authorities. "Recently, there are rumors circulating on the Internet about the reorganisation of Hengda Real Estate. The relevant documents and pictures are fabricated and are pure defamation, causing serious damage to the Company's reputation," it said in a statement.
In 2016, Evergrande proposed a reverse listing of Hengda, a subsidiary which holds most of its property assets. The move would have shifted those assets into an existing Shenzhen real-estate firm, in exchange for shares or cash. Companies listed onshore typically fetch a higher valuation than those in Hong Kong.
Since then, Evergrande has raised 130 billion yuan in three rounds by selling a little over a third of Hengda to strategic investors. Those buyers had the option of demanding 70 billion yuan of their investment returned if the listing wasn't completed by January 2020. Investors agreed to extend that deadline to January 2021, when the whole 130 billion yuan could be recalled.
Hong Hao, chief strategist at Chinese state-owned bank BoCom International, said he was skeptical about the company's response to the documents. "Where there is smoke, there is fire," he said.
Mr. Hong said the market already thought Evergrande was struggling, but the company could still turn things around if the government let it move quickly to merge Hengda with a peer and raise capital.
Evergrande has relied on price reductions this year during slowdowns in activity related to the coronavirus pandemic.
For the first half of the year, the company r eported a near-50% cut in net profit compared with a year earlier, and debt rose compared with measures such as earnings before interest, tax and accounting charges.
Evergrande has a higher debt interest burden than any other listed nonfinancial company in the world, according to S&P Global Market Intelligence data. As of the end of June, it owed 835.5 billion yuan to lenders, the equivalent of $122.7 billion, almost half of which is due for repayment by the end of June 2021.
Nigel Stevenson, an analyst at Hong Kong-based GMT Research, said Evergrande's success had been "predicated on continuing to grow and burying the old issues. The way to get through that is to become bigger and bigger."
"What has surprised us with Evergrande is quite how they've managed to continually pull a rabbit out of a hat, to find some sort of financing," said Mr. Stevenson, who has previously published research skeptical of Evergrande's accounting and financial policies.
The Chinese property sector in general is heavily leveraged, making up more than half of the Asian high-yield dollar bond market.
Bingyan Wang contributed to this article.
Write to Mike Bird at Mike.Bird@wsj.com and Xie Yu at Yu.Xie@wsj.com