Evergrande liquidation order rattles China’s economy
Michael Smith, Reuters
Tokyo—China Evergrande Group, the property developer at the centre of China’s real estate crisis, will be broken up and liquidated under a Hong Kong court order, in a move [that] has sent shockwaves through the country’s financial system and could ultimately weaken demand for Australian exports.
While Evergrande has a limited presence in Australia, the impact of the forced sale of assets and debt default on China’s beleaguered property sector and the broader economy had been identified by the Reserve Bank of Australia as a risk to Chinese demand for Australian goods and services.
Hong Kong’s High Court on Monday ordered Evergrande to be liquidated, dashing hopes Beijing might still bail out what was once the country’s biggest property developer. It also ended nearly two years of failed negotiations with creditors to find a solution.
The company’s financial woes have become a symbol of China’s property crisis, which is considered the biggest threat to the world’s second-largest economy at a time when it is also battling high unemployment, falling exports, weak consumer confidence, and high local government debt.
“It is time for the court to say enough is enough,” Justice Linda Chan said on Monday in Hong Kong.
Shares in Evergrande trading in Hong Kong fell 21 per cent ahead of the order, which had been widely expected. The move is expected to further sap confidence in Chinese and Hong Kong equities, which have lost more than $9 trillion in value since their 2021 peak. China on Monday introduced new restrictions on short selling aimed at stemming the sharemarket rout.
Insolvency experts said creditors were unlikely to recover much of their investment in the company, which has most of its assets in China.
While Hong Kong established a cross-border insolvency agreement with some cities in China in 2021, those arrangements have not yet been tested, and it was unclear how co-operative courts and authorities would be with a liquidator.
“For overseas creditors, their focus will be on whether the liquidator will succeed in obtaining assistance from mainland [China] courts to seize assets in the mainland,” said Redmond Wong, Saxo’s chief economist for China.
“The level of assistance that the liquidator receives will be a litmus test for the mechanism. For shareholders of the listed company in Hong Kong, the likelihood of obtaining anything from the winding-up process is very low.”
Country Garden, another embattled Chinese housing giant, last week sold its last remaining Australian asset, Wilton Greens, to another Chinese developer 11 years after it first entered the market. Most Chinese developers have already withdrawn most of their capital from Australia.
Still, economists have long warned there could be a knock-on effect from Evergrande’s problems for the Australian economy, which relies heavily on iron ore exports to support China’s steelmaking sector. So far, a slowdown in housing construction in China has not had a negative impact on iron ore demand.
“The property sector is a key part of the Chinese economy and could negatively interact with long-running macro-financial imbalances in China through interlinkages with local government financing, shadow banking activities, and banks,” the Reserve Bank of Australia said in its Financial Stability Assessment in October.
Evergrande, which used to be China’s largest property developer, first defaulted on bond repayments in December 2021. It has more than $US300 billion ($455 billion) in debt.
The way international creditors in the Evergrande case are treated under a liquidation order will be closely watched by foreign investors, who are becoming increasingly nervous about China. Xi Jinping’s government has signalled it wants to attract more foreign capital after years of regulatory uncertainty.
While iron prices remain strong as China’s steel mills stockpile ahead of the Lunar New Year holidays, miners will be watching for any sign that Evergrande’s liquidation has dampened demand for the commodity, given billions of dollars of unfinished construction projects hang in the balance.
While there were signs before the pandemic that China’s property market was overvalued and developers were too reliant on debt, Evergrande’s financial problems were a wake-up call for a sector which used to make up 30 per cent of China’s GDP.
After property sales peaked in 2020, big developers such Evergrande defaulted in 2021 after a government crackdown on speculation. More than two years later, property sales and prices continue to fall and debt problems at other developers, such as Country Garden, triggered fresh contagion fears.
Reuters says that since 2021, companies accounting for 40 per cent of Chinese home sales have defaulted – most of them private property developers. As they struggle to access funding, many homes remain unfinished, and residents have been left out of pocket, or sometimes forced to live in half-completed high-rise buildings with no running water. Suppliers and creditors are not being paid.
“The liquidation order is not entirely a surprise to the market given the creditors were still not able to agree on the restructuring terms,” said Zerlina Zeng, a credit analyst at CreditSights Singapore. With most assets on the mainland, “I doubt its offshore creditors would receive substantial recovery proceeds from the liquidation order”.
Most of Evergrande’s dollar notes were traded about 1.5¢ on the dollar last Friday.
While creditors were not seeking a wind-up order, Justice Chan noted the lack of progress. “The company said it will do one, two, three,” she said. “None of that has been done.”
Still, “even after a wind-up, it’s still possible for the company to put forward a scheme of arrangement.”
China’s economy is still expected to grow more than 4 per cent this year.
“Despite the real estate downturn, China met its 5 per cent growth target in 2023,” said Louis Kuijs, Asia Pacific chief economist at S&P Global Ratings.
But economic momentum at the end of 2023 was less strong than the headline numbers suggest. “We believe falling prices at industry and retail levels point to overcapacity in some major goods markets, he added.
Photo on front page: Aerial photo shows a residential area of Evergrande in Nanjing. Source: Reuters.
Reactions: Hong Kong court orders liquidation of China Evergrande
Reporting by Reuters Asia bureaus, compiled and edited by Subhranshu Sahu
Background
- Evergrande defaulted on offshore debt in late 2021, becoming a symbol of the debt crisis that has engulfed China`s property sector.
- The world`s most indebted developer has around $300 billion of liabilities and $240 billion of assets.
- The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao which said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.
- Evergrande had been working on a $23 billion debt revamp plan for two years.
- Its original plan was scuppered in late September when it said its billionaire founder Hui Ka Yan was under investigation for suspected crimes.
- An ad hoc bondholder group had been siding with the developer in opposing the liquidation petition until the last hearing in early December.
A Hong Kong court on Monday ordered the liquidation of China Evergrande Group (3333.HK), opens new tab, a move likely to send ripples through China`s crumbling financial markets as policymakers scramble to contain the deepening crisis.
Market Reaction:
Trading in shares of China Evergrande (3333.HK), opens new tab, China Evergrande New Energy Vehicle Group (0708.HK), opens new tab, and Evergrande Property Services (6666.HK), opens new tab was halted. The benchmark Hang Seng Index (.HSI), opens new tab was up 1.2%.
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Wang Bo, Chief Investment Officer, Jurun Capital, Shanghai
"This Evergrande thing has the potential to go either way at this point. The first is whether an offshore liquidation is equivalent to a domestic consolidated bankruptcy. Even if it is equivalent to judicial bankruptcy, I think it is difficult to say whether this workload can be replicated. On the other hand, the most nervous property developers at the moment will definitely be the least qualified ones."
Mark Dong, Co-Founder And General Manager, Minority Asset Management, Hong Kong
"The liquidation had been expected, and now it`s confirmed. It has already been priced in."
Cai Hongfei, Property Analyst, Central Wealth Securities
"I think the impact is limited. Evergrande no longer has ability to operate. It cannot solve its own problem, so has no other choice but liquidation. And the boss has been arrested. Evergrande is a special case."
Nicholas Chen, Analyst, Creditsights, Singapore
"For other troubled Chinese developers, overall market sentiment would undoubtedly be affected, though each company`s restructuring is dependent on myriad of factors...
"Nevertheless, the cases of Evergrande and Jiayuan, which also received a winding up order in May last year, highlight that defaulted developers would need to provide a concrete restructuring plan to the HK courts and they do not have a perpetual runway to do so.
"In terms of regulatory stance, we expect the increasingly supportive policy environment to provide some breathing room for the cash-strapped property sector, though the extent of the breathing room for each developer is likely to vary. We expect the regulatory support to remain bifurcated and biased towards the stronger (mostly state-linked) developers."
Redmond Wong, Chief China Strategist, Saxo Markets, Hong Kong
"For overseas creditors, focus will be on if the liquidator will succeed in its applications for assistance to mainland courts in Shanghai, Shenzhen and Xiamen under the cooperation mechanism established in 2021 and get hold of assets in the mainland. For shareholders of the listed company (of Evergrande) in Hong Kong, the likelihood of getting anything out of the winding up process is very low."
Damien Boey, Chief Macro Strategist, Barrenjoey, Sydney
"These issues are well known for some time. The companies that are in trouble are the ones we have known about, so I think the best thing that you can do as a policymaker with the stated policy intent is to make sure that you take control of these unwind processes and make them orderly. And I think that`s what they`re doing. And so if you can do that, then you can avoid more blow-ups and unforeseen issues in the property sector. And, you can avoid some of the collateral damage.
"So, I think we`re closer to the end of this wind-up cycle than the beginning, provided that policymakers do what the market actually wants them to do, which is obviously stimulate growth and support the property sector and it looks to me they`re doing that."
Raymond Cheng, Head Of China Research, Cgs-Cimb Securities, Hong Kong
"The liquidation order will be negative for Evergrande itself for sure, the assigned liquidator will offload the company assets as soon as possible, and the price may be very bad.
"It might affect sector sentiment in the short term, but Evergrande`s restructuring has its own specific problems. It is possible that other developers will be willing to compromise more in negotiations as they fear creditors will be applying for liquidation."
Gary Ng, Senior Economist, Natixis
"It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande`s daily operations even harder. As most of Evergrande`s assets are in mainland China, there are uncertainties about how the creditors can seize the assets and the repayment rank of offshore bondholders, and situation can be even worse for shareholders. Investors will be concerned about whether there will be a snowball effect on other developers as the queue to liquidation is long."
Andrew Collier, Managing Director, Orient Capital Research, Hong Kong
"Evergrande`s liquidation is a sign that China is willing to go to extreme ends to quell the property bubble. This is good for the economy in the long term, but very difficult in the short term."
Wong Kok Hoong, Head Of Equity Sales Trading, Maybank, Singapore
"The Hang Seng Property index still trading marginally higher. Evergrande (has been) ongoing for some time now, think investors have moved past this."
Matt Simpson, Senior Market Analyst, City Index, Brisbane
"I think 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, but I doubt it will boost confidence in the property sector on this news alone."
Ken Cheung, Chief Asian Fx Strategist, Mizuho, Hong Kong
"The markets are still focused on the property sector downturn in China, so I think they will evaluate if this liquidation or the events (will) pose any impact on the progress to fix the property sector in China, and how the Chinese government will make any arrangement due to this kind of court case impact."
Kenny Ng, Securities Strategist, China Everbright Securities International Company, Hong Kong
"This may further impact the confidence of mainland creditors and increase the difficulty of Evergrande`s restructuring in mainland China. At the same time, this may also affect investors` confidence in the mainland real estate industry and the willingness of mainland residents to purchase properties. This has the potential to have a dampening effect on the economy and the capital market.
"Whether offshore creditors can apply for the sale of Evergrande`s assets in mainland China will depend on whether the mainland courts recognise or enforce the winding-up order from Hong Kong. If recognised or enforced, offshore creditors have a chance to claim for the assets in the mainland. Otherwise, they can only apply for the liquidation of assets in Hong Kong."
(This story has been corrected to change Redmond Wong`s quote to `established` from `re-established`)
Photo on this page: An exit sign is seen in front of residential buildings at an Evergrande residential complex in Beijing, China 27 September 2023. Florence Lo/ Reuters File Photo.
| Themes |
| • Financialization • Financing • International • Legal frameworks • National • Subsidies • Urban planning |
