A Hong Kong court issued a liquidation order to China Evergrande Group, kicking off a difficult process to dismantle the greatest casualty of a property crisis that is upending the world’s second-largest economy.
In June 2022, Top Shine Global Limited of Intershore Consult (Samoa) Ltd., a strategic homebuilder’s online sales platform investor, submitted the petition for liquidation. Today’s decision is expected to send shockwaves through China’s collapsing financial markets as regulators try to contain a worsening crisis.
Evergrande liquidation sends the market to RED
Justice Linda Chan decided to liquidate the world’s most indebted developer, with over $300 billion in total liabilities, after noting Evergrande’s inability to provide a concrete restructuring plan more than two years after defaulting on a bond repayment and many court hearings.
“It is time for the court to say enough,” said Chan, who will explain her argument later on Monday. Evergrande was valued at only $275 million on Monday when trade was halted, down more than 99% from its peak.
While Hong Kong’s courts have issued at least 3 wind-up orders for other Chinese developers since the crisis began in 2021, none compare to Evergrande in terms of complexity, asset size, and number of stakeholders.
There is also scant evidence that smaller peers Jiayuan International Group and Yango Justice International Ltd., a unit of Yango Group Co., are making significant progress in their liquidations.
Evergrande Chief Executive Siu Shawn assured Chinese media that the company will continue to provide home-building projects despite the liquidation order. He noted that the ruling will have no impact on Evergrande’s onshore or offshore operations.
Given the number of authorities involved, the decision paves the way for a lengthy and complicated process with possible political implications. Offshore investors will be looking at how Chinese authorities treat foreign creditors when a company collapses.
Amid the ongoing crisis, some have noted a disparity in how Hong Kong and the United States handle insolvency. One user on X says:
Jin Cramer argues this is a positive, not a negative.
The effects of Evergrande’s liquidation on global markets
The liquidation will be closely followed by global investors, who have withdrawn billions of dollars from mainland China, citing concerns about an uneven playing field for foreign capital as President Xi Jinping tightens the Communist Party’s grip over the economy.
Policymakers may have to strike a compromise between restoring investor confidence and ensuring that unfinished homes are constructed and the financial system remains resilient in the face of the property industry’s troubles.
Prior to the hearing, Evergrande’s shares had fallen as much as 20%. Following the ruling, trading was halted in China Evergrande and its listed companies, China Evergrande New Energy Vehicle Group and Evergrande Property Services.
The Hang Seng index is up over 125 points, while India’s Sensex index has risen nearly 1,000 points. Despite Evergrande’s $300 billion liquidation, the Chinese and regional Asian stock markets rebounded Monday. As a result, Evergrande’s liquidation may have little impact on the US stock market, given Asian markets recovered swiftly.
The Dow Jones Industrial Average closed roughly 61 points higher on Friday and is expected to rise further this week. The US stock market survived various difficulties in 2023, including forecasts for a recession from top analysts and global institutions.
Hong Kong’s insolvency proceedings have limited reverence in China, where courts can appoint administrators in their own jurisdictions. This raises the topic of claims accessible to holders of Evergrande dollar bonds worth $17 billion, which are covered by the proposed restructuring plan.
Amid these traditional financial woes, crypto investors argue that Bitcoin cannot be liquidated. One investor argues that:
The company will not go down without a fight. Evergrande requested another adjournment on Monday after its lawyer stated that it had made “some progress” on the restructuring proposal. In the most recent offer, the developer recommended that creditors swap their debts for all of the shares the company owns in its two Hong Kong units, as opposed to interests of around 30% in the subsidiaries prior to the last hearing in December.
Evergrande’s counsel stated that liquidation would affect the company’s operations, including its property management and electric car sections, reducing the group’s capacity to repay all creditors.
