Months after China Evergrande ran out of cash and defaulted on its debt in 2021, investors around the world are betting that the Chinese government will eventually step in to bail out the real estate developer at a discount. I got a loan.
On Monday, it became clear just how wrong that bet was. After two years of impasse, Evergrande was ordered liquidated by a Hong Kong court, setting off a race among lawyers to find and seize Evergrande's assets that could be sold.
The order could also send a shockwave through financial markets already nervous about China's economy.
Evergrande is a real estate developer with over $300 billion in debt and in the midst of the world's largest housing crisis. There is little left of value in its vast empire. And because Chinese assets are intertwined with politics, even those assets may be off-limits.
Like Evergrande and other developers, it overbuilt and overpromised, leaving hundreds of thousands of homebuyers waiting for apartments while siphoning money into apartments that weren't built. Now that dozens of these companies have defaulted on their debts, the government is desperately trying to get the apartments completed, but the contractors and builders have not been paid for years, making it difficult for everyone. I am in a difficult position.
What happens next with Evergrande's unwinding will test foreign investors' long-held belief that China will treat them fairly. The results could help stimulate or further curb capital flows into the Chinese market at a time when global confidence in China is already wavering.
“People will be watching closely to see if creditor rights are being respected,” said Dan Anderson, a partner and restructuring expert at law firm Freshfields Bruckhaus Deringer. “Whether they are respected will have long-term implications for investment in China.”
China needs investment from foreign investors more than ever in recent history.
Hong Kong's financial markets, long a gateway to mainland China and foreign investment, have been hit hard, with authorities scrambling to find policy tools such as a stock market rescue fund to restore confidence. China's housing market also shows little sign of returning to boom times, partly because the Chinese government wants to redirect economic growth toward construction and investment.
Escalating diplomatic tensions between the US and China, leading to large outflows of foreign currency from China, are not helping.
Investors will be watching for a resolution to the Evergrande lawsuit and how China handles disputes over dozens of struggling companies in the real estate sector alone.
Specifically, it wants to determine whether the people currently tasked with carrying out the liquidation will be admissible in mainland Chinese courts, something that has not happened historically.
Under a reciprocal agreement signed in 2021 between Hong Kong and Beijing, mainland Chinese courts will approve Hong Kong court-appointed liquidators and allow creditors to take control of Evergrande assets located in mainland China. Become. However, so far only one in five such requests before Chinese local courts have been granted.
Monday's ruling, handed down by Judge Linda Chan, comes after the past two years as creditors and other parties agreed to a delay to give the company more time to reach an agreement with creditors on how much to pay. It had already been postponed many times. .
As recently as last summer, Evergrande's management and some of the foreign creditors in Hong Kong that had lent the company money in US dollars appeared to be close to a deal. Talks hit a brake in September when several senior executives were arrested and eventually founder and chairman Hui Kar Yang was taken into police custody.
Mr Anderson said Monday's court ruling was a “big bang” and “will bring some kind of scream as liquidators go after the assets”.
