A Hong Kong court has ordered the liquidation of China Evergrande Group, once China’s second-largest property developer, after the struggling real estate giant failed to reach a debt restructuring agreement with creditors owed over $300 billion. The ruling marks the end of Evergrande’s 13-year rise to becoming an empire with over 1300 projects across 280 cities, and now a fall that has sent shockwaves through the global economy.
The Build-up to Evergrande’s Colossal Collapse
Founded in 1996 in Guangzhou, China Evergrande grew rapidly in the 2000s under the leadership of chairman Xu Jiayin. The company expanded into real estate development, with a vision of “creating value for society” through building quality properties.
By 2014, Evergrande had over 500 projects across China and total assets worth $56 billion. Xu earned a spot among China’s top billionaires, with a personal net worth peaking at $45 billion in 2017. Evergrande was even labeled “too big to fail” as it continued its aggressive expansion across China.
However, in an effort to continue growing, Evergrande took on increasing debt. While Evergrande reported assets of around $350 billion in June 2022, it had amassed over $300 billion of debt including bank loans, bonds, and payments owed to suppliers across China.
Concerns emerged in 2020 that Evergrande was overleveraged. The company struggled to make bond payments, slowing construction of projects. Chinese regulators introduced “three red lines” limits on debt levels that further strained Evergrande’s liquidity.
The real crisis emerged when Evergrande failed to pay $83.5 million in bond coupons by September 2021. With liabilities over 1.9 trillion yuan ($260 billion), Evergrande started trying to quickly sell assets to raise capital and avoid default. However, potential buyers were wary of Evergrande’s financial troubles.
By late 2022, Evergrande had over $300 billion in unpaid debts, unfinished property projects across China, and its stock price had plunged 80%. Unable to make debt and construction payments, the Chinese government stepped in to manage the crisis. Restructuring negotiations began with international creditors to try to avoid liquidation.
The Liquidation Order Signaling Evergrande’s End
On January 29th 2024, after months of unsuccessful restructuring negotiations, a Hong Kong high court approved a liquidation order for Evergrande. The ruling came after an offshore creditor, Chinese Estate Holdings Limited, petitioned the court to wind up Evergrande over an unpaid $10.8 million debt.
With liabilities over $300 billion globally, Evergrande’s liquidation will be one of the biggest ever corporate failures. The empire built by Xu Jiayin has come crashing down after its uncontrolled debt-fueled expansion.
Evergrande must now use its remaining assets to pay off creditors, rather than focus on finishing property developments. Its Hong Kong-listed shares have been suspended since March 2022 during the restructuring saga. Trading of onshore bonds, wealth management products, and private equity products has also been halted. There are worries minority shareholders and Chinese home buyers waiting for unfinished apartments will struggle to get their money back.
The winding down of Evergrande’s sprawling businesses will be complex. Evergrande has over $30 billion in bank loans in China, $20 billion globally in private bonds, unpaid bills to over 1000 suppliers, and 38 million square meters of unfinished properties across 234 cities according to Citigroup.
|Evergrande’s Global Assets & Creditors
|38 million square meters of properties across China
|Bank loans in China
|Over $30 billion
|Offshore private bonds
|Around $20 billion owned by international asset managers
|Owed over $100 billion to 1000s of materials suppliers in China
|Wealth management & equity products
|Sold $50B in WMPs to 70K investors. Halted trading.
There is uncertainty around how senior Evergrande’s different creditors will be, and how much assets offshore operations like Hong Kong real estate can fetch. International creditors worry they may recover little if Chinese operations are prioritized first in the liquidation. However, a coordinated process between mainland China and Hong Kong administrators offers some reassurance.
Consequences of a Giant’s Collapse for China and Beyond
Evergrande’s failure raises wider fears for the stability of China’s $60 trillion property sector which accounts for 25-30% of GDP. Several other major Chinese developers like Sunac and Shimao have also defaulted on debts. Policymakers stopped bailouts last year to rein in over-leverage.
The question is whether the liquidation of Evergrande will spill further chaos, or remain orderly. So far, news of the liquidation order has not sparked panic selling of Chinese developers’ shares or bonds. Investors are potentially reassured by the coordinated handling of Evergrande’s failure between Chinese authorities and Hong Kong.
However, Evergrande’s collapse will still drag on China’s economy this year. Growth is already slowing to around 5% as Covid disruptions and property woes combine. Evergrande’s liquidation may impact :
- Housing demand – buyers may hold off on purchases until the property impact is clearer. Housing sales fell 22% last year.
- Construction sector – 20 million migrant workers are employed building China’s apartments. A construction slowdown means less jobs.
- Materials suppliers – thousands of unpaid Evergrande suppliers now face huge losses too.
- Banks – $30B+ loans to Evergrande may default, eroding bank profits.
- Wealth management investors – 70,000 WMP investors may get little back from $50B products.
- Government revenues – land sales fell 26% last year, denting local finances.
Overseas recessions may be avoided, but global growth forecasts for 2024 have already been trimmed ~0.2 percentage points due to China’s property woes. Firms with high China exposure like commodity producers face lower demand.
So while an orderly unwinding of Evergrande is positive, China’s property bubble bursting still drags on global growth. And with President Xi refusing bailouts and prioritizing “common prosperity”, the empire’s collapse is a warning against uncontrolled capitalist expansion in China.
What Next After Liquidation?
The focus now turns to Evergrande’s administrator working with creditors to sell assets and distribute the proceeds. Valuable assets like Evergrande’s property services unit, electric vehicle arm, and Hong Kong real estate could attract Chinese state-owned buyers. However, asset values are impaired by the market downturn, limiting creditor repayments.
International creditors worry the liquidation favors domestic lenders first given Evergrande’s 190 onshore entities, and only 2 registered offshore. Bondholders have discussed a coordinated response to recover assets abroad like Evergrande’s Hong Kong-listed China Evergrande New Energy Vehicle unit. But still, many offshore creditors face heavy losses.
Minority shareholders and homebuyers also confront uncertainty around getting money back. So far, 126,000 Evergrande apartment buyers are still waiting for unfinished developments across China to be completed. And 70,000 investors are owed $50 billion in frozen Evergrande wealth management products. Authorities may push the administrator to prioritize homebuyers and small investors to maintain social stability.
Looking ahead, President Xi will likely continue tight property regulations to reduce speculative buying, while loosely supporting home prices and construction to cushion the economy. Companies like Country Garden and Vanke can gain market share from addressing unfinished Evergrande projects. So while Evergrande’s empire has toppled, China’s property sector should slowly stabilize this year, although risks remain if more major developers fail.
For Evergrande’s founder Xu Jiayin, the collapse is a dramatic fall from leading China’s second largest developer just two years ago to now struggling with over $300 billion in debts. Once Asia’s richest man worth $42 billion in 2017, his fate now depends on the recovery value for Evergrande creditors. Perhaps the biggest lesson is the empire became too beholden to debt-funded expansion, and failed when the lending tap was turned off.
In summary, Evergrande’s liquidation order closes the final chapter for China’s most indebted property developer after failing to fix its balance sheet. While an orderly unwinding is positive, Evergrande’s collapse still drags on China’s economy. And the emperor’s fate now lies in ruins alongside his empire sinking under $300 billion of unpaid debts.