Evergrande will be dismantled, a 'Big Bang' end to years of stumbling
Months after China Evergrande ran out of cash and defaulted in 2021, investors around the world scooped up the property developer's discounted IOUs on the assumption that the Chinese government would eventually step in to save the country.
On Monday it became clear how misleading that bet was. After two years in limbo, Evergrande was ordered into liquidation by a Hong Kong court, a move that will set off a race for lawyers to find and seize anything belonging to Evergrande that can be sold.
The order is also likely to send shockwaves through financial markets, which are already wary about the Chinese economy.
Evergrande is a real estate developer with more than $300 billion in debt and in the middle of the world's largest housing crisis. There isn't much left in the vast empire worth much. And even those assets can be off-limits, because property has become intertwined with politics in China.
Evergrande, like other developers, overbuilt and overpromised, taking money for apartments that had not yet been built and leaving hundreds of thousands of homebuyers waiting for their apartments. Now that dozens of these companies have gone bankrupt, the government is frantically trying to force them to finish building the apartments, putting everyone in a difficult position as contractors and builders have not been paid for years.
What happens next in Evergrande's unwinding will long test foreign investors' faith that China will treat them fairly. The outcome could help boost or further curb the flow of money into Chinese markets at a time when global confidence in China has already been shaken.
“People will be keeping a close eye on whether creditors' rights are being respected,” said Dan Anderson, partner and restructuring specialist at law firm Freshfields Bruckhaus Deringer. “Whether they are respected will have long-term implications for investment in China.”
China needs investment from foreign investors now more than ever in its recent history.
Financial markets in mainland China and Hong Kong, which for years have been an entry point for foreign investment, have taken such a hit that officials are looking to policy measures such as a stock market bailout fund to shore up confidence. And China's housing market shows little sign of a return to boom, partly because Beijing wants to shift economic growth away from construction and investment.
Rising diplomatic tensions between the United States and China, which have led to a large outflow of foreign money from China, are not helping.
Investors are watching the resolution of the Evergrande case to see how China will handle disputes over its worthless companies, of which there are dozens in the real estate sector alone.
Specifically, they will want to see whether the people now charged 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 between Hong Kong and Beijing in 2021, a court in mainland China would recognize the liquidator appointed by the Hong Kong court to allow creditors to take control of Evergrande's assets in mainland take over China. But so far only one of five such requests to local Chinese courts has been granted.
Monday's decision, handed down by Judge Linda Chan, had already been postponed several times over the past two years as creditors and other parties agreed to a delay to give the company more time to reach an agreement with creditors about how much they could be paid. .
As recently as last summer, it appeared that Evergrande's management team and some foreign creditors who had lent the company money in U.S. dollars in Hong Kong were closing 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 arrested by police.
The court's ruling on Monday was “a big bang,” Mr. Anderson said, which “will lead to something of a howl as administrators hunt for assets.”