After nearly two years of false starts, last-ditch proposals and pleas for more time, China Evergrande, a giant developer, has been ordered to dismantle itself. This is a big moment. The collapse of Evergrande in 2021 sent China’s housing market into recession. Concerns in real estate, where most households park their savings, helped push the economy into recession.
The scale of Evergrande’s empire is enormous: hundreds of cities are involved in its development. It controls dozens of businesses and has more than $300 billion in debt – far more than the value of its assets. The company’s liquidation puts it in the same universe as Lehman Brothers, the US bank that filed for bankruptcy in 2008 with $600 billion in debt.
Evergrande bankruptcy will play out in Hong Kong and China. The courts of those two jurisdictions can determine winners and losers among the company’s creditors. Ultimately, government officials in Beijing may get involved. This process will take years and will certainly be complex.
What is the latest?
Hong Kong Judge Linda Chan on Monday ordered the liquidation of Evergrande and appointed Alvarez & Marsal, a firm specializing in bankruptcy cases, to manage the bankruptcy proceedings. The firm’s role will be to help creditors – particularly foreign investors who had lent money to Evergrande – get some of their money back. Speaking to reporters outside Hong Kong’s High Court, Alvarez & Marsal executives said they would meet with the company to decide next steps.
“Our priority is to see that the majority of the business is retained, restructured or kept in operation,” said Tiffany Wong, managing director of the restructuring firm. She said she would work with Evergrande executives to get creditors their money in a way that “minimizes disruption.”
Alvarez and Marsal will need the cooperation of Evergrande executives to figure out what assets are left and how to distribute them to creditors. If this does not go smoothly, the company may take its case to a court in mainland China.
Hong Kong has long enjoyed a semiautonomous status within China that separates it from the rest of the country. By mutual agreement between Hong Kong and Beijing, courts in mainland China may recognize decisions of Hong Kong judges. In this case, recognition from a mainland court could actually allow Evergrande’s foreign creditors to lay claim to the company’s assets.
Who is in charge of Evergrande now?
The simple answer is Alvarez & Marsal, who will replace the board of directors of China Evergrande Group, the parent company that oversees the core development business and several other entities, including the company that develops electric vehicles.
There is another answer: the Chinese government has influence over the entire process. Generally, Beijing controls foreign investors within China. If Chinese authorities don’t want Evergrande’s creditors to try to claim assets in China, courts could block creditors.
Alvarez and Marsal may try to physically take over Evergrande’s Chinese subsidiaries by removing their legal representatives. But Evergrande has hundreds of subsidiaries and local officials at those units, or even employees of the subsidiaries, could try to block any takeover.
What stake does Beijing have in Evergrande’s fate?
The Chinese government plays a major role in all aspects of the economy, especially the real estate sector. A deep and worrying slowdown in home sales began when Beijing banned excessive borrowing by the industry. The government wanted to take the heat out of the real estate boom.
Due to this, dozens of private real estate developers were laid off from their jobs. Many defaulted on their loans – Evergrande was the largest ever. Also, developers desperate for cash started taking risky decisions, such as selling apartments before they were even built. Now, hundreds of thousands of home buyers have paid for apartments that have not been completed from companies that no longer exist. Beijing needs someone to pay the bills.
Evergrande is a company. Why does this matter for a country the size of China?
This 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. For years, China has benefited from Hong Kong’s status as a global financial capital, and the predictability of its legal system has helped it establish itself.
Restructuring deals and liquidations involving Chinese real estate companies are relatively new. These include some of the world’s largest investors, including companies that manage pension funds for American workers. Dozens of cases like Evergrande’s are being dealt with through the courts in Hong Kong.
“The crisis is symptomatic of property companies and the property market more generally,” said David Goodman, director of the Center for China Studies at the University of Sydney. “We should care because the Chinese economy is at the center of the world economy and even small economic shocks can destabilize it.”