The Evergrande Group, facing turmoil in the real estate sector, has received a directive to undergo liquidation, a decision that has the potential to undermine confidence in the world’s second-largest economy.
This verdict was delivered by a Hong Kong court on Monday, following the company’s inability to persuade the judge about the viability of its plan to restructure a substantial $300 billion in debts.
“The court deems it necessary to intervene,” stated Judge Linda Chan, expressing her decision on the Evergrande case. “It would be a situation where the court says enough is enough. I consider that it is appropriate for the court to make a winding-up order against the company, and I so order.”
This decisive ruling comes after 18 months of legal disputes initiated when creditor Top Shine filed a petition in 2022, seeking to wind up the developer as a means to recover its losses.
Evergrande, acknowledged as the world’s most indebted developer, faced a brief respite in December when it successfully argued for time to refine its restructuring plan. However, Judge Linda Chan emphasized that the court had clearly communicated in December its expectation for a fully formulated and viable proposal.
Expressing regret over the ruling, Evergrande Executive Director Shawn Siu asserted the group’s commitment to doing “everything possible to safeguard the stability of its domestic business and operation,” highlighting its independence from its Hong Kong arm.
Evergrande’s default on repayments to international investors in 2021, amid Beijing’s crackdown on excessive borrowing for real estate, had profound repercussions across China’s property sector, which constitutes an estimated 15-30 percent of the economy. Over the past three years, more than 50 Chinese real estate developers, including Evergrande, have defaulted or missed payments, according to credit ratings agency Standard and Poor’s (S&P).
Following Monday’s ruling, Hong Kong-listed Evergrande shares plummeted over 20 percent, prompting the city’s stock exchange to halt trading. This development adds to the concerns for China’s $18 trillion economy, already grappling with challenges ranging from crackdowns on private industry to declining population and an exodus of foreign capital.
China’s official GDP growth of 5.2 percent in 2021 marked the worst performance in decades, excluding the impact of the COVID-19 pandemic. Economist Gary Ng suggests that while Evergrande’s liquidation may pose challenges for itself and other developers, its impact on the already beleaguered property sector and the macroeconomy may be limited.
The uncertainty surrounding Evergrande’s asset sheet looms large. Despite an agreement recognizing insolvency and restructuring proceedings in Chinese cities like Shenzhen, Shanghai, and Xiamen, it remains unclear whether mainland courts would sanction liquidators seizing Evergrande’s assets in the country. The distinctive legal systems of Hong Kong, with its common law framework, and mainland China further complicate the situation, raising questions about the creditors’ ability to seize assets and the repayment hierarchy of offshore bondholders.
