Evergrande, symbol of China’s property crisis, heads to liquidation

By CNN Newsource

Published January 28, 2024 6:55 pm

By Laura He and Nectar Gan, CNN

Hong Kong (CNN) — A court in Hong Kong has ordered the winding up of Evergrande Group, the world’s most indebted property developer, dealing another blow to investor confidence as China’s ailing real estate sector continues to weigh on its economy.

The liquidation order, made by the city’s High Court on Monday, comes after the embattled Chinese real estate giant and its overseas creditors failed to agree on how to restructure the company’s massive debt during talks that lasted for 19 months.

“It seems to me that the interests of the creditors will be better protected if the company is wound up by the court, so that independent liquidators can take control over the company,” Judge Linda Chan said in the ruling published Monday.

Evergrande defaulted on its debt in 2021, sparking a property crisis in China’s economy, which continues to feel the effects. The Shenzhen-based developer, with total liabilities of 2.39 trillion yuan ($333 billion) at the end of June last year, filed for bankruptcy in New York in 2023.

Overseas creditors are owed $25 billion, the Hong Kong court document showed, and one of them — Top Shine Global — filed the winding up petition against Evergrande in Hong Kong in June 2022 in a bid to recover part of its losses.

The court has appointed Alvarez and Marsal as liquidator to manage the company, Evergrande said in a filing to the Hong Kong stock exchange. It will have powers to seize Evergrande assets in Hong Kong — such as the group’s office tower located in the commercial district of Wan Chai — and sell them to raise funds, but the implications for the company’s vast business in mainland China are unclear.

Evergrande CEO Xiao En told state media on Monday that the liquidation order doesn’t affect the operations of subsidies that are “independent legal entities,” including its main property development business, Hengda Real Estate Group, which has most of its assets in mainland China.

“At present, the management and operation systems of Hengda Real Estate Group and other domestic and overseas subsidiaries as independent legal entities remain unchanged,” he told the 21st Century Business Herald.

That’s because the legal systems of Hong Kong and China remain distinct, despite Beijing’s growing control over the former British colony in recent years.

“Today’s liquidation order will have very limited immediate impact on Evergrande’s onshore operations or assets,” said Brock Silvers, chief investment officer for Hong Kong-based Kaiyuan Capital.

Hong Kong and the mainland city of Shenzhen — where Evergrande is based — have a mutual insolvency recognition agreement, but it’s “effectively inoperative” and courts in the city are “extremely unlikely” to recognize the offshore liquidator, Silvers said.

“To do so would threaten the availability of Evergrande’s onshore assets to resolve its onshore obligations. Onshore, Evergrande tomorrow will be much like Evergrande yesterday,” he said.

Another blow to investor confidence

Chinese markets were mixed on Monday in the wake of the liquidation order, with Hong Kong stocks rising but indexes in Shanghai and Shenzhen falling again, after a brief respite last week from a protracted rout.

Since their recent peaks in February 2021, about $6 trillion — equivalent to roughly twice Britain’s annual economic output — has been wiped off the value of Chinese and Hong Kong stocks.

While the fate of the wider company may still be unclear, Evergrande’s winding-up order is another blow to investor sentiment. If mainland China doesn’t recognize the liquidation order, international creditors are likely to suffer heavy losses on their exposure to Evergrande.

“Evergrande’s offshore liquidation was mostly expected, but it’s still a significant setback for an already troubled onshore real estate sector, one which will further decay investor sentiment,” Silvers said.

Chinese developers face $100 billion in maturing obligations this year and local governments’ financing arms also have $650 billion worth of debt due. Meanwhile, the real estate crisis has started to spill over into the wider financial system because of the exposure of shadow banks to the sector.

“Given all of these impending solvency issues, Evergrande’s creditors will likely face a near wipe-out. All of which contributes to the current crisis of confidence in China’s capital markets,” Silvers added.

Apart from the record downturn in real estate, investors are also concerned about Chinese deflation, debt, a falling birthrate and shrinking work force, as well as Beijing’s shift towards ideology-driven policies.

Evergrande, the poster child for China’s property crisis, unveiled a multi-billion-dollar restructuring plan last March.

But that plan was derailed in September after Chinese authorities said the company’s founder and chairman Xu Jiayin was suspected of “crimes” and detained by the police.

The spiralling property crisis has struck a hard blow to the Chinese economy.

For decades, China’s robust growth had been propelled by a housing boom fuelled by a growing population and rapid urbanisation. The industry accounted for as much as 30% of the country’s GDP, and more than two-thirds of Chinese household wealth is tied up in real estates.

But the sector fell into trouble after the government clamped down on excessive borrowing by developers in 2020 in an attempt to cool the property bubble. Since then, dozens of Chinese developers have defaulted on their debts.

The industry has since become a drag on the broader economy, which is grappling with a slow recovery from three years of pandemic lockdowns and a series of headwinds, from record high youth unemployment to mounting financial stress at local governments.

In December, new home prices fell by the highest amount in nearly nine years, and property investment slumped 9.6% in 2023 from the previous year, marking a second straight year of declines.

This story has been updated with new information.

Lucas Lilieholm contributed to reporting.