China Evergrande Group, once China’s second-largest property developer, has been ordered to liquidate by a Hong Kong court after failing to agree on a restructuring plan with creditors owed nearly $300 billion. This historic court ruling plunges Evergrande into full-scale liquidation and will have major implications for China’s property sector and economy.
Lead Up to Liquidation Order
Evergrande has been struggling under the weight of over $300 billion in debts and liabilities for over two years. The company’s downward spiral began in 2020 when new borrowing rules were introduced. This limited developers’ ability to acquire new financing. Compounding troubles, Evergrande had sold presale properties and used the funds to acquire new land and properties instead of completing existing projects.
By September 2021, concerns over the company defaulting led to a 80% plunge in Evergrande’s stock price and fears of contagion across China’s property sector. The company narrowly avoided default over the next year by making last minute payments. However, by late 2022 creditors had run out patience with Evergrande’s inability to complete a restructuring plan.
Talks with creditors completely broke down in December. Evergrande’s offshore creditors then applied to the Hong Kong court to winding up the company in January 2023. This set the stage for today’s historic liquidation order.
|Key Dates in Evergrande’s Downfall
|Shares plunge 80% on default concerns
|Evergrande narrowly avoids default by last minute payments
|Restructuring talks with creditors completely break down
|Offshore creditors apply for liquidation order
|January 29, 2024
|Hong Kong court grants liquidation order
Hong Kong Court Grants Liquidation Order
On January 29, 2024 Evergrande’s fate was sealed when the Hong Kong High Court officially granted the creditors’ petition to liquidate the company. Evergrande had $7.4 billion in offshore debt tied up in the Cayman Islands. This allowed the offshore creditors to successfully file for liquidation in a Hong Kong court.
Mr Justice Harris of the Hong Kong High Court approved the creditors’ winding-up petition, citing Evergrande’s inability to pay its debts as basis for liquidation. He appointed restructuring accountants from Alvarez & Marsal as joint provisional liquidators to oversee disposal of Evergrande’s Hong Kong assets. Trading of Evergrande shares on the Hong Kong Stock Exchange has also been officially suspended.
Evergrande issued a statement acknowledging the court order and said it will consider further steps. The company added that operations will continue during the liquidation process. However, the court order effectively spells the beginning of the end for Evergrande after months of uncertainty.
What Happens Next in the Liquidation Process
The court order grants the joint provisional liquidators wide ranging powers to sell off Evergrande’s Hong Kong assets to repay creditors. They will work with Evergrande’s board and management to liquidate the company in an orderly fashion.
Evergrande owns many valuable assets in Hong Kong including office towers, retail spaces, car parks and large residential developments. These liquid assets are estimated to be worth around $7.5 billion and will be first to be sold off. The provisional liquidators have already set up a hotline and email for parties interested in acquiring Evergrande assets.
Once Hong Kong assets are sold off, focus will turn to Evergrande’s profitable China operations. These include entertainment, tourism and healthcare companies, as well as internet technology Evergrande New Energy Vehicle Group. Finding buyers for Evergrande’s China assets could be more complex and contentious due to Chinese government involvement.
While asset sales occur, Evergrande will also need to go through the formal winding down process. This involves assessing creditor claims, paying off secured lenders first, terminating contracts and laying off thousands of employees.
The entire liquidation process could take many months or even years to fully complete given Evergrande’s enormous size and complex web of assets and creditors. But the court order marks the beginning of the end.
Impacts on China’s Property Sector and Economy
Evergrande’s collapse will send shockwaves through China’s $60 trillion property sector leading many analysts to draw comparisons to the Lehman Brothers downfall. Fears will heighten over dozens of other Chinese developers defaulting on debts and sinking into bankruptcy.
Several major developers are already facing liquidity issues. These include Shimao Group, Sunac China and Kaisa Group according to rating agencies S&P and Fitch. There are worries offshore creditors could file winding up petitions against other struggling developers now that the precedent has been set by the Evergrande case.
A wave of developer bankruptcies could spark panic selling in China’s property market leading to plunging prices. This would reduce consumer confidence and investment in real estate. China Bull Management analyst, David Chao, forecasts national property prices could fall 30-50% over the next year triggering the worst housing crisis in Chinese history.
The property sector accounts for 25-30% of China’s GDP. A severe property downturn would drag down China’s economic growth significantly. Oxford Economics is projecting China’s GDP growth could decelerate to just 2% in 2024 spurred by the fallout from Evergrande’s failure. This would put millions of Chinese jobs at risk.
The Chinese government will likely step in with stimulus measures and financing support to rescue distressed developers deemed ‘too big to fail’. However, Beijing seems intent on using Evergrande as a warning sign to rein in excessive borrowing. This means there could be a wave of consolidation where bloated property players are forced into bankruptcy or restructuring.
In the aftermath of Evergrande’s historic liquidation order, all eyes will be on how Chinese regulators balance property sector stabilization with their deleveraging and debt reduction campaign. The stakes are extremely high for China to properly manage risks without capsizing the world’s second largest economy.
International Contagion Fears
While the direct impacts of Evergrande’s failure will be concentrated in China, there are fears financial contagion could spread globally. Jittery investors have already wiped over $80 billion from Hong Kong stocks led by property firms. Hong Kong’s Hang Seng index sunk to a 10-year low.
There are also worries over 40 major international banks taking large write downs from their $20 billion in loans exposure to Evergrande. Swiss investment bank, UBS, sees high potential for international contagion given opaque disclosures around which institutions hold Evergrande debt.
Moreover, anxious global investors could start dumping emerging market assets in Asia triggering capital outflows. This would place pressure on regional currencies from the yuan to rupee. Market selloffs may also ensue if liquidity issues arise across Hong Kong and Chinese banks.
So while Evergrande’s bankruptcy is first and foremost a Chinese crisis, Taiwan Ratings agency warns global growth could suffer if financial distress escalates abroad impacting access to credit. The world will be monitoring closely how foreign economies and companies weather the Evergrande storm now that the company’s fate is sealed.
The Hong Kong court ordering Evergrande’s liquidation closes the chapter on one China’s largest and most indebted conglomerates. But Evergrande’s demise also opens a perilous period of uncertainty for China’s property sector and global markets. Asset sales and winding down operations will begin immediately under the appointed liquidators.
Yet the vast magnitude of Evergrande’s $300 billion debts and sprawling footprint mean full liquidation could take years to complete. All eyes are now focused on how Chinese regulators plan to contain collapsing property prices, deteriorating economic growth, distressed banks and panicking homebuyers.
Beijing has tools to smooth out the crisis, but is also determined to rein in excessive borrowing. This balancing act, along with mitigating international contagion risks, makes Evergrande’s historic liquidation a complex inflection point with few precedents on guidance. The stakes for China and the world could not be higher in properly resolving the fallout from the ‘Lehman moment’ of China’s property bubble exploding.
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