Trading in shares of China’s second largest property developer, China Evergrande Group, and its electric vehicle and property service units was halted today as a Hong Kong court ordered the liquidation of the debt-ridden company.
The court’s move to wind up Evergrande comes after months of financial turmoil and failed restructuring efforts. Evergrande defaulted on billions of dollars of offshore debt obligations in late 2021 and has struggled to pay suppliers, creditors and complete housing projects.
The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao. Top Shine said Evergrande failed to honor an agreement to repurchase shares it had purchased in the subsidiary.
Evergrande had been attempting to restructure over $300 billion in total liabilities for two years. But the company’s plans fell apart in September 2022 when Evergrande said its billionaire founder Hui Ka Yan was under investigation for suspected financial crimes.
An ad hoc group of offshore bondholders had opposed Evergrande’s liquidation until early December, hoping to negotiate a debt restructuring plan. But with the company’s founder under criminal investigation, creditors lost hope of reaching a deal.
The Hong Kong court’s ruling Monday to appoint liquidators effectively spells the end for Evergrande after months of uncertainty. The far-reaching impacts of Evergrande’s collapse will ripple through China’s fragile real estate sector and could dampen economic growth.
Expert Analysis on Liquidation Impacts
Financial analysts say Evergrande’s long-expected liquidation will send shockwaves through China’s property market and banking system. Here’s what experts had to say:
Matt Simpson, Senior Market Analyst at City Index in Brisbane, said:
“The bigger surprise here is that it took so long for Evergrande to be liquidated. Clearing out the deadwood should be seen as a positive for China’s property sector, but I doubt this alone will restore confidence.
Ken Cheung, Chief Asian FX Strategist at Mizuho Bank in Hong Kong, said:
“Markets are still focused on China’s real estate downturn, so they’ll evaluate whether this liquidation impacts efforts to fix the sector and how the government responds.
Kenny Ng, Securities Strategist at China Everbright Securities International, said:
“Mainland Evergrande creditors may lose confidence and debt restructuring on the mainland will be harder. Property buyer confidence and economic growth may also take a hit if this dampens the mainland real estate market.
Ng added that offshore creditors can only claim Evergrande’s mainland China assets if mainland courts recognize the Hong Kong ruling.
Fall of an Empire
Evergrande’s collapse concludes a dramatic downfall for the company and its billionaire founder Hui Ka Yan.
Just a few years ago, Evergrande was China’s most valuable real estate developer, with over 1,300 projects across 280 cities. Hui amassed a personal fortune of over $40 billion as he expanded Evergrande aggressively.
The company’s business model depended on selling apartments quickly by offering homebuyers steep discounts and attractive payment plans. Evergrande pumped proceeds from presales into acquiring more land and properties.
But in 2020, China imposed new “three red lines” rules to control the amount of debt property developers could accumulate. Evergrande was overleveraged and struggled to adapt to the regulations.
As sales slowed and access to new loans dried up, Evergrande began missing payments to suppliers, creditors and homebuyers. More than 1.5 million homebuyers are still waiting for completed apartments they already paid for.
With over $300 billion in liabilities, Evergrande’s failure became inevitable once it started defaulting on offshore bonds late last year. The company scrambled to sell assets and stake in subsidiaries, but generated little cash.
Hui stepped down after regulators opened a probe into potential fraud in September 2022. He faces allegations of illegal lending, bribery and corruption that sank Evergrande.
Many see Evergrande as a symbol of China’s reckless corporate debt bubble. But the company grew to epic proportions under Hui’s aggressive leadership. Its collapse leaves an enormous hole in China’s economy that may take years to repair.
What Happens Next
Liquidators will now take control of Evergrande’s remaining assets and work to sell them off to pay creditors. But the process is expected to be messy given Evergrande’s complexity.
The company has over 1,300 real estate projects in varying stages of completion. Many homebuyers already paid Evergrande in full and will be seeking refunds. But liquidators must also deal with unpaid contractors and suppliers critical to finishing those projects.
Banks and other lenders are owed massive debts that likely far exceed the value of assets liquidators can sell. Employees, smaller investors and bondholders will also vie for repayment.
Mainland China creditors may have difficulty recovering debts if mainland courts don’t recognize the Hong Kong ruling. Offshore bondholders could potentially claim Evergrande’s China assets if courts allow cross-border enforcement.
But most expect creditors to suffer major losses, especially bondholders lower in priority. Many subsidiaries and joint ventures could be broken up and sold independently.
Regulators are hopeful a controlled liquidation of Evergrande will avoid wider contagion. But the property sector accounts for 25-30% of China’s GDP. Evergrande’s failure will further hurt market confidence, tighten credit for other developers and drag on growth.
The People’s Bank of China and regulators will likely take steps to ensure adequate liquidity in banking and shore up the property sector. But with a sluggish economy and rising unemployment, China faces tough challenges ahead.
Evergrande’s liquidation closes the book on a controversial company that came to symbolize China’s reckless corporate debt boom. For years, Hui Ka Yan managed to grow Evergrande into an empire by borrowing heavily and selling the Chinese dream of homeownership. But in the end, that empire came crumbling down.