Months after China Evergrande ran out of cash and defaulted in 2021, investors around the world scooped up the real estate developer’s updated IOUs, betting that the Chinese government would eventually step in to bail it out.
On Monday, it became clear how wrong that bet was. After two years of uncertainty and with more than $300 billion in debt, a Hong Kong judge has ordered Evergrande to liquidate, a move that will spark a race by lawyers to try to find and record everything that belongs to Evergrande and which could be sold. .
In a small courtroom on the 12th floor of Hong Kong’s High Court, Evergrande’s lawyers pushed to reach a last-minute deal. They argued that a liquidation would harm Evergrande’s business and would not help creditors get their money back. They wanted more time to try to reach a deal with Evergrande’s creditors.
But after 40 minutes of debate, Linda Chan, the bankruptcy judge presiding over the case, made the decision to issue an order directing Evergrande to cease operations, citing the company’s inability to present a proposal. concrete in court for a year and a half. years.
“I think this would be a situation where the court would say: enough is enough,” Ms Chan said.
This order means that Evergrande, which has been cleaning house for two years, unable to pay its debts or operate normally but still in business, will now likely face a prolonged period of dismantling a massive company with projects spanning hundreds cities and independent businesses like an electric vehicle company.
The order sent shockwaves through the company’s Hong Kong-listed shares, sending the stock price tumbling more than 20 percent before trading halted. The court’s decision is likely to ripple through China’s struggling real estate sector and financial markets, which are already nervous about China’s economy.
There’s not much left in Evergrande’s sprawling empire that’s still of value. And any valuable asset can be banned because ownership in China is now closely tied to politics.
Evergrande, along with other developers, overbuilt and overpromised, taking money for apartments that weren’t finished and leaving hundreds of thousands of buyers waiting for their homes. Dozens of these companies have defaulted, leaving the government frantically trying to force them to complete the apartments, putting contractors and builders in a difficult situation because they have not been paid for years.
The aftermath of Evergrande’s dismantling will test foreign investors’ long-held belief that China will treat them fairly. The result could help boost or further dampen the flow of money into Chinese markets at a time when global confidence in China is already shaken.
“People will be watching closely to see if creditors’ rights are being respected,” said Dan Anderson, a partner and restructuring specialist at law firm Freshfields Bruckhaus Deringer. “Their compliance will have long-term consequences for investments in China. »
China needs foreign investment more than ever in its recent history.
Financial markets in mainland China and Hong Kong – a city that has for years been an entry point for foreign investment – have taken such a hit that authorities are scrambling to find policy measures like a stock bailout fund for build confidence. On Sunday, they decided to stop short selling, a practice that allows investors to bet against a stock.
China’s real estate market shows few signs of a return to boom times, in part because Beijing wants to redirect economic growth toward construction and investment.
Growing diplomatic tensions between the United States and China, which have led to large outflows of foreign capital out of China, are not helping.
Investors are looking to the resolution of the Evergrande affair to see how China will handle disputes over its disreputable companies, of which there are dozens in the real estate sector alone.
Specifically, they will want to see if the people who are now responsible for carrying out the liquidation will be recognized by a mainland Chinese court, which has never happened historically.
Under a mutual agreement signed in 2021 between Hong Kong and Beijing, a mainland Chinese court would recognize the liquidator appointed by the Hong Kong court to allow creditors to take control of Evergrande’s assets in mainland China. But so far, only one of five such requests to local Chinese courts has been granted.
Monday’s decision had already been repeatedly delayed for nearly two years, with creditors and other parties agreeing to postpone the decision to give the company more time to reach an agreement with creditors on the amount that could be paid to them.
As recently as last summer, it appeared that Evergrande’s management team and some of its offshore creditors who had slowed the company’s U.S. dollar investment in Hong Kong were close to reaching a deal . Negotiations were disrupted in September when several high-level executives were arrested and the founder and chairman, Hui Ka Yan, was eventually arrested by police.
The court’s decision on Monday was “a big bang”, Mr Anderson said, which “will result in a bit of a groan as the liquidators chase after the assets”.
Speaking to reporters outside the courtroom on Monday, a lawyer representing the main group of creditors said he was not surprised by Ms Chan’s decision.
“We have been ready, willing and able to undertake the entire process to reach an agreement with the company,” said Fergus Saurin, a partner at Kirkland & Ellis, which advises the creditors. “There has been a history of last minute commitments, which have come to nothing, and in these circumstances the company is only responsible for its liquidation.”