It was among symbols of economic growth in Chinais now heading towards liquidation with the status of most indebted real estate company in the world. The race of Evergrande, a Chinese real estate giant, seems to be coming to an end. On January 29, 2024, a court in Hong Kong issued an order to liquidationdecreeing one of the largest corporate failures in the country’s history.
The decision now seemed imminent, but it still had a significant impact on the market: after the announcement, trading on Evergrande’s stock was interrupted, closing with a drop of more than 20%. Evergrande’s liquidation order came after two years of financial uncertainty and debt exceeding $300 billion. In recent years the company has found itself forced to sell all the assets it could to satisfy creditors, but not everyone will be able to see their debts repaid.
What happens with Evergrande
The Hong Kong court issued Evergrande’s liquidation order after the company made a last-minute request for a three-month extension to submit a new restructuring plan. Judge Chan who issued the liquidation order justified it by claiming that no restructuring proposal had been received.
After the liquidation ruling, i Evergrande titlesas well as those of its subsidiaries Evergrande Nev and Evergrande Services, were suspended since the listing on the stock exchange and have undergone a loss of more than 20%with its value falling to 0.16 Hong Kong dollars.
Evergrande’s market capitalization slumped to US$275 million, from a peak of US$56 billion in 2021. While Hong Kong saw a modest increase of 0.78%, major Chinese real estate developers, including Country Garden and Sunac, saw a 1-3% increase. However, the Shanghai and Shenzhen stock markets recorded significant losses of -0.92% and -2.42% respectively.
The legal, as well as economic, issue
Here there is also a problem of a jurisprudential, as well as economic, nature. The majority of Evergrande’s debts are held by mainland Chinese lenders, and these creditors have limited legal avenues to recover their money. In reverse, Foreign creditors have the option of taking cases to court outside mainland Chinaand some of them have chosen Hong Kong as the venue to file lawsuits against Evergrande, as the company is listed in this city.
The company’s electric vehicle subsidiary was also caught up in the market disruption. Evergrande’s executive director, Shawn Siu, stated his disappointment with the court’s decision, stressing that the company had done everything possible to avoid this situation.
Following the liquidation order, the directors of Evergrande’s companies will lose control. A provisional liquidator, usually a government employee or a partner in a professional firm, will likely be appointed by the court. Subsequently, following meetings with creditors, a formal liquidator will be appointed.
Although there is an agreement between the courts of China and Hong Kong to recognize the appointment of liquidators, effective enforcement of this agreement has been limited. Only two of six applications submitted by courts in three pilot areas in mainland China were recognized. This further complicates the legal situation upon Evergrande’s liquidation.
How we got to this point: a brief excursus
The liquidation order arrives more than two years after Evergrande’s official defaultat the end of 2021, triggered by a general liquidity crisis in the Chinese real estate sector. Although Evergrande is listed in Hong Kong, the majority of its assets and liabilities are located in China. The Chinese real estate sector contributes significantly to the country’s economy, representing approx a quarter of China’s GDP. For this reason the topic has often been addressed by the Chinese regime of Xi Jinping.
In September 2023, a deal between Evergrande and its international creditors fell through after Chinese authorities failed to issue some necessary approvals. Furthermore, the president and founder of the group, Hui Ka Yanhad been subject to “mandatory measures in accordance with the law” by the authorities, who had spoken of “crimes“, without however specifying the crimes of which he was suspected.
The consequences of the Evergrande crisis on the international market
Evergrande’s liquidation order shook global financial markets, as many investors had bet on the possibility that the Chinese government would intervene again to save the company.
In July, Evergrande cited a Deloitte analysis that estimated a 3.4% recovery rate on its debt if the company were to liquidate. Creditors now expect a recovery rate of less than 3%. Before this decision, creditors had low expectations on the recovery rate of their investments, estimating it at less than 3%. Additionally, more than 1.5 million homebuyers had already paid large sums to Evergrande for homes not yet completed, creating further credit holes.
Also there Hong Kong’s reputation as an international financial hub is under threat, as this liquidation order represents a test of the credibility of the city’s courts. The international implications will depend on how the liquidation is handled and how well the interests of international creditors are protected. It is clear that there is now a lot of concern among foreign investors in China, particularly in real estate-related sectors.
The liquidation of Evergrande comes at a time of general mistrust in the Chinese economy, amidst the real estate crisis, risks of deflation and demographic problems. With possible effects on international, European and Italian markets too.
The role of the Chinese Communist Party
The challenge for Chinese President Xi Jinping and the Chinese Communist Party is twofold: on the one hand, guaranteeing a house to buyers who have paid Evergrande in advance, before construction work, to avoid social problems. On the other hand, avoid risks of contagion from the real estate bubble to the banking system, with also possible shocks at an international level.
While international creditors try to protect their investments, the evolution of the situation remains uncertain, also because Evergrande is not the only Chinese real estate group in difficulty. Others like Sunac China, Jiayuan and Kaisa face similar problems. The Hong Kong court’s decision sends a strong message: flimsy debt restructuring proposals will not be tolerated.