A Hong Kong court has ordered the liquidation of China Evergrande Group, once China’s top-selling property developer, after it defaulted on more than $300 billion in debt accumulated over years of aggressive expansion. The liquidation order marks the beginning of the end for a company that came to symbolize China’s overheated property market.
Years of Rapid Growth Fueled by Debt
Founded in Guangzhou in 1996, Evergrande grew at a breakneck pace for over two decades by borrowing heavily to acquire land and properties across China. Under chairman Xu Jiayin, Evergrande came to epitomize China’s ravenous demand for property during this real estate boom.
The company’s debt fueled acquisitions and rapid expansion. While this model drove Eye-popping sales growth for many years, it also loaded Evergrande with close to $300 billion in debt and liabilities by the early 2020s.
Cracks Emerge in Evergrande’s Business Model
Evergrande was able to take on so much debt because the property market kept growing, banks were willing lenders, and interest rates stayed low. However, in 2020 policymakers began trying to rein in corporate debt levels to curb property market speculation. This shifted the business environment significantly.
As access to new loans became restricted, Evergrande struggled to generate enough cash through sales to service its massive debt pile. Cracks began to emerge in 2021 as warnings signs flashed about its financial health. Despite asset sales, debt restructuring talks, and government prodding of creditors, Evergrande eventually defaulted on its offshore bonds in December 2022.
|Key Evergrande Events
|S&P and Fitch downgrade Evergrande’s credit rating to junk status
|Evergrande warns of cash flow issues if sales don’t improve
|Evergrande defaults on payment to offshore bondholders
|Evergrande enters debt restructuring negotiations
|Evergrande officially defaults on its offshore bonds
|Hong Kong court approves petition to liquidate Evergrande
Liquidation Order Caught Few By Surprise
By early 2024 Evergrande had run out of time and options. While the court’s liquidation approval disappointed those still hoping for a restructuring, it was not a huge surprise given Evergrande’s circumstances.
Most experts had long warned that Evergrande’s mountain of liabilities made recovery unlikely, even with government oversight and creditor coordination. Liquidation was seen by many analysts as inevitable without a government arranged bailout, which Beijing was unwilling to offer.
Still, some creditors hoped Evergrande might pull off a “managed liquidation” to prevent outright collapse. But with $300 billion in total liabilities scattered across obscure financing channels, coordinating any orderly unwinding proved enormously complex.
Ultimately time ran out for Evergrande to broker a settlement, leading creditors to take the matter to Hong Kong’s courts by petitioning for liquidation. With years of missed payments and little progress on restructuring, Hong Kong’s judge agreed the firm’s assets should be liquidated.
Support Shares in Evergrande Units Rebound After Court Order
Evergrande’s winding up process will be complex, given the web of financing and corporate structures under its umbrella. But shares in key Evergrande property services units like Evergrande Property Services actually rose on news of the court order.
Analysts believe the liquidation may allow profitable Evergrande subsidiaries to emerge from the group’s wreckage once broken free from the distressed parent company. This optimism lifted share prices for still viable underlying businesses that can continue operating despite the headquarters liquidation.
So while the Evergrande brand name fades into history, portions of Xu Jiayin’s empire may gain new life by detaching from the debt-laden mothership through the liquidation process now underway.
China Unlikely to Step In to Rescue Offshore Creditors
Many outside China who invested in Evergrande debt through offshore bonds had hoped Beijing might bailout the company as a show of good faith to foreign creditors.
But policymakers made clear that while they intervened to limit economic contagion, any government action would focus on social stability and protecting domestic investors – not offshore bondholders. Few expect authorities to allow Evergrande’s foreign debts to significantly disrupt liquidation plans.
This leaves many US and other international creditors facing almost total loss as Evergrande winds down operations under court supervision. With little political momentum for a special rescue package targeting offshore investors, their billion dollar bets on Evergrande look increasingly like losing wagers Beijing feels no obligation to repay.
Evergrande Collapse Unlikely to Cause Major Financial Crisis
Despite Evergrande’s extremely large size relative to global companies, most economists believe its failure will not significantly destabilize China’s financial system. Chinese property as an asset class appears less systematically important than Western housing markets. And heavy state control over banking should buffer knock-on effects.
However Evergrande’s demise still deals a major blow to the economy and developer finances. Alongside other struggling Chinese property firms, its breakup will lead banks to reduce real estate lending. This tightening of credit access will drag on growth in coming quarters.
The property sector directly accounts for around 25% of China’s GDP. So a prolonged downturn in construction and housing sales precipitated by the Evergrande liquidation and wider property finance crisis may have major macroeconomic consequences.
Further Government Intervention on Economy Possible
If weakness in property and construction begins cascading across China’s economy from plummeting developer investment, watch for authorities to take stabilizing action. However Beijing seems unlikely to ease property curbs or provide direct stimulus unless growth decelerates sharply.
Sectors like commodities and consumer goods reliant on property and downstream construction are most vulnerable economically from Evergrande’s failure. Those dependent on capital flows into China’s high-yield junk bond market may also suffer, given developers like Evergrande heavily utilize these channels.
So Evergrande’s collapse does not equal disaster for China or signal imminent financial crisis as in 2008. But the economic ripples from liquidating one of China’s biggest-ever borrowers seem sure to dampen global recovery prospects as the world struggles with inflation and supply chain instability.
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