Months after China Evergrande ran out of cash and was set to default in 2021, investors around the world took advantage of the property developer’s discounted IOUs, betting that the Chinese government would eventually step in to rescue it.
On Monday it became clear how wrong that bet was. After two years in limbo, Evergrande was ordered liquidated by a Hong Kong court, a move that will set off a race among lawyers to find and grab anything related to Evergrande that can be sold Is.
The order is also likely to jolt financial markets that are already worried about China’s economy.
Evergrande is a real estate developer with more than $300 billion in debt and is in the middle of the world’s largest housing crisis. There is nothing left in his vast empire that is of much value. And even those assets may be off limits as property has become entangled with politics in China.
Evergrande, as well as other developers, overbuilt and overpromised, taking money for apartments that had not yet been built and leaving hundreds of thousands of home buyers waiting for their apartments. Now that dozens of these companies have defaulted, the government is trying to put pressure on them to complete the apartments, putting everyone in a difficult situation as contractors and builders have not been paid for years.
What happens next after Evergrande’s demise will test foreign investors’ long-held belief that China will treat them fairly. The outcome could help increase or decrease the flow of funds into Chinese markets at a time when global confidence in China is already shaken.
“People will be watching closely to see whether creditor rights are being respected,” said Dan Anderson, partner and restructuring expert at law firm Freshfields Bruckhaus Deringer. “Whether they are respected will have a long-term impact on 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 been hit so hard that officials are struggling to find policy measures such as stock market hedge funds to boost confidence. And China’s housing market is showing little sign of a return to its boom days, partly as Beijing seeks to redirect economic growth away from construction and investment.
The rising diplomatic tensions between the United States and China, which have led to a massive outflow of foreign funds from China, are not helping.
Investors are looking to the resolution of the Evergrande case to see how China will handle disputes over its vulnerable companies, of which there are dozens in the property sector alone.
In particular, they will want to see whether those now tasked with liquidating will be recognized by a mainland China court, which has historically not been the case.
Under a mutual agreement signed in 2021 between Hong Kong and Beijing, a mainland Chinese court will recognize a Hong Kong court-appointed liquidator to allow creditors to take control of Evergrande assets in mainland China. But so far only one in five such requests to local Chinese courts has been approved.
Monday’s decision, which was handed down by Judge Linda Chan, had already been delayed several times over the past two years as creditors and other parties agreed to a postponement to give the company more time to reach a settlement with creditors. expressed how much they could be paid. ,
As recently as last summer, it looked as if Evergrande’s management team and some of its offshore creditors, who had lent the company money in US dollars in Hong Kong, were reaching a deal. Talks broke down in September when several high-level officials were arrested and, ultimately, founder and chairman Hui Ka Yan was detained by police.
The court’s decision on Monday was “a huge bombshell”, Mr Anderson said, adding it would “cause some frustration as the liquidator pursues the estate”.