China Evergrande must be liquidated, a judge said. What happens now?
After nearly two years of false starts, last-ditch proposals and pleas for more time, China Evergrande, a giant real estate company, has been ordered to dismantle itself. It's a big moment. The collapse of Evergrande in 2021 sent China's housing market into a tailspin. Concerns surrounding the real estate sector, where most households invest their savings, caused the economy to enter a recession.
The size of Evergrande's empire is enormous: its developments span hundreds of cities. It controls dozens of companies and has a debt load of more than $300 billion – a sum far greater than most people think its assets are worth. The liquidation of the company puts it in the same universe as Lehman Brothers, the American bank that filed for bankruptcy in 2008 with a debt burden of $600 billion.
Evergrande's bankruptcy will take place in Hong Kong and China. Courts in these two jurisdictions can determine the winners and losers among the company's creditors. Ultimately, government officials in Beijing could become involved. The process will take years and will certainly be complicated.
What is the most recent?
A Hong Kong judge, Linda Chan, ordered Evergrande's liquidation on Monday and appointed Alvarez & Marsal, a firm that specializes in bankruptcy cases, to manage the resolution. The company's role will be to help creditors – mainly foreign investors who made loans to Evergrande – get some of their money back. Speaking to reporters outside Hong Kong's High Court, Alvarez & Marsal executives said they will meet with the company to determine next steps.
“Our priority is to retain, restructure or keep operational as much of the business as possible,” said Tiffany Wong, director of the restructuring firm. She added that it would work with Evergrande executives to get creditors their money in a way that “minimizes disruption.”
Alvarez & Marsal will need the cooperation of Evergrande executives to figure out what assets are left and how to distribute them to creditors. If that doesn't go smoothly, the company can take the case to a court in mainland China.
Hong Kong has long had a semi-autonomous status within China that sets it apart from the rest of the country. By mutual agreement between Hong Kong and Beijing, courts in mainland China can recognize judgments by Hong Kong judges. In this case, recognition by a mainland court could effectively allow Evergrande's foreign creditors to pursue a claim against the company's assets.
Who's in charge of Evergrande now?
The easy answer is Alvarez & Marsal, which will replace the board of directors of China Evergrande Group, the parent company that oversees its core real estate development business and many other entities, including one that develops electric vehicles.
There is another answer: the Chinese government oversees the entire process. In general, Beijing has control over foreign investors in China. If Chinese authorities do not want Evergrande's creditors to try to claim assets in China, the court can block the creditors.
Alvarez & Marsal could attempt to physically take over Evergrande's Chinese subsidiaries by replacing their legal representatives. But Evergrande has hundreds of subsidiaries, and the local authorities of those units, or even employees of the subsidiaries, could try to block any takeovers.
What is Beijing's stake in Evergrande's fate?
The Chinese government plays an important role in all aspects of the economy, but especially in the real estate sector. What has become a deep and alarming slowdown in home sales began when Beijing restricted lending in the sector. The government wanted to take the heat out of the real estate boom.
This led to the cull of dozens of private real estate developers. Many could no longer pay off their debts; Evergrande was by far the largest. Gradually, developers desperate for money began making dangerous decisions, such as selling apartments before they were built. Now hundreds of thousands of home buyers have paid for uncompleted apartments from companies that no longer exist. Beijing needs someone to foot the bill.
Evergrande is one company. Why is this important for a country as big as China?
It matters because Evergrande's liquidation will be a litmus test for foreign investors in troubled Chinese companies. It is also a test of China's legal system and its willingness to accept the rule of law in Hong Kong. China has benefited for years from Hong Kong's status as a global financial capital, and the predictability of its legal system has contributed to this.
Restructuring deals and liquidations involving Chinese real estate companies are relatively new. This involves some of the largest investors in the world, including companies that manage the retirement funds of American workers. Dozens of cases like Evergrande's are going through the courts in Hong Kong.
“The crisis is symptomatic for property companies and the property market in general,” said David Goodman, director of the University of Sydney's China Studies Centre. “We should care because China's economy is the heart of the global economy and even small economic shocks can destabilize it.”