Real Estate Giant China Evergrande Will Be Liquidated
Months after China Evergrande ran out of cash and defaulted in 2021, investors around the world scooped up the property developer’s discounted I.O.U.’s, betting that the Chinese government would eventually step in to bail it out.
On Monday it became clear just how misguided that bet was. After two years in limbo, Evergrande was ordered by a court in Hong Kong to liquidate, a move that will set off a race by lawyers to find and grab anything belonging to Evergrande that can be sold.
The order is also likely to send shock waves through financial markets that are already skittish about China’s economy.
Evergrande is a real estate developer with more than $300 billion in debt, sitting in the middle of the world’s biggest housing crisis. There isn’t much left in its sprawling empire that is worth much. And even those assets may be off limits because property in China has become intertwined with politics.
Evergrande, as well as other developers, overbuilt and over promised, taking money for apartments that had not been built and leaving hundreds of thousands of home buyers waiting on their apartments. Now that dozens of these companies have defaulted, the government is frantically trying to force them to finish the apartments, putting everyone in a difficult position because contractors and builders have not been paid for years.
What happens next in the unwinding of Evergrande will test the belief long held by foreign investors that China will treat them fairly. The outcome could help spur or further tamp down the flow of money into Chinese markets when global confidence in China is already shaken.
“People will be watching closely to see whether creditor rights are being respected,” said Dan Anderson, a partner and restructuring specialist at the law firm Freshfields Bruckhaus Deringer. “Whether they are respected will have long term implications for investment into China.”
China needs investments from foreign investors now more than ever in its recent history.
Financial markets in mainland China and Hong Kong, which has for years been an entry point for foreign investment, have received such a blow that officials are scrambling to find policy measures like a stock market rescue fund to shore up confidence. And China’s housing market shows little signs of returning to the boom days, in part because Beijing wants to redirect economic growth from construction and investment.
Rising diplomatic tensions between the United States and China, which has led to large outflows of foreign money from China, is not helping.
Investors are looking to the resolution of the Evergrande case to see how China will handle disputes over its deadbeat companies, of which there are dozens in the property sector alone.
Specifically, they will want to see whether the people who are now tasked with carrying out the liquidation will be recognized by a court in mainland China, something that historically has not happened.
Under a mutual agreement signed in 2021 between Hong Kong and Beijing, a mainland Chinese court would recognize the Hong Kong court-appointed liquidator to allow creditors to take control of Evergrande assets in mainland China. But so far only one of five such requests to local Chinese courts has been granted.
Monday’s decision, which was handed down by Judge Linda Chan, had already been delayed multiple times over the past two years as creditors and other parties agreed to adjourn to give the company more time to reach an agreement with creditors on how much they might be paid.
As recently as last summer, it seemed as though Evergrande’s management team and some of its offshore creditors that had lent the company money in U.S. dollars in Hong Kong were closing in on a deal. The talks hit the brakes in September when several high level executives were arrested and, eventually, the founder and chairman, Hui Ka Yan, was detained by police.
The court’s decision on Monday was “a big bang,” Mr. Anderson said, that will “lead to something of a whimper as liquidators chase assets.”