On Monday, a Hong Kong court has issued an order for the liquidation of China Evergrande Group, a decision poised to reverberate through the already fragile financial markets in China. Evergrande, recognized as the world’s most indebted developer with a staggering total liability surpassing USD 300 billion, significantly disrupted the struggling property sector by defaulting on its debt in 2021. This default triggered a wider debt crisis in the sector, leading to numerous company defaults and continuing to impede economic growth.
The liquidation ruling, impacting a developer with USD 240 billion in assets, is expected to have a substantial impact on the delicate state of Chinese capital and property markets. At a time when Beijing grapples with a faltering economy, its worst property market performance in nine years, and a stock market at near five-year lows, any additional market shocks could further complicate policymakers’ efforts to revive growth.
While the liquidation process may prove intricate, involving potential political considerations due to the involvement of various authorities, its immediate effect on the company’s operations, including ongoing home construction projects, is likely to be minimal. This is because it could take months or even years for the offshore liquidator appointed by creditors to assume control of subsidiaries in mainland China, a jurisdiction separate from Hong Kong.
Evergrande had been actively engaged in a USD 23 billion debt revamp plan with an ad hoc bondholder group for nearly two years. However, this plan faced a setback in late September when the company revealed that its billionaire founder, Hui Ka Yan, was under investigation for suspected crimes. The initial liquidation petition was filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao, citing the developer’s failure to honor an agreement to repurchase shares in the subsidiary.
The legal proceedings underwent several adjournments, and Hong Kong High Court Justice Linda Chan had previously stated that the December hearing would represent the final opportunity to decide on Evergrande’s liquidation in the absence of a “concrete” restructuring plan.
Prior to the recent court order on Monday, at least three other Chinese developers had already been directed by a Hong Kong court to undergo liquidation since the commencement of the ongoing debt crisis in mid-2021.
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