Chinese Evergrande is liquidated by Hong Kong Court – 01/28/2024 – Market

Months after China Evergrande ran out of money and defaulted in 2021, investors around the world bought the real estate developer’s discounted debt securities, betting that the Chinese government would eventually step in to save it.

On Monday (29), it became clear how wrong this bet was. After two years in limbo, Evergrande has been ordered by a court in Hong Kong to liquidate, a move that will trigger a scramble by lawyers to find and grab anything belonging to Evergrande that can be sold.

The order is also likely to spark turmoil in financial markets, which are already nervous about China’s economy.

Evergrande is a real estate developer with more than US$300 billion in debt, located in the middle of the biggest housing crisis in the world. There isn’t much left in his vast empire that’s worth much. Even these assets may be out of reach because property in China has become intertwined with politics.

Evergrande, like other developers, built too much and promised too much, taking money for apartments that had not been built and leaving hundreds of thousands of homebuyers waiting for their apartments.

Now that dozens of these companies have defaulted, the government is frantically trying to force them to complete the apartments, putting everyone in a difficult position as contractors and builders have not been paid for years.

What happens next in the Evergrande development will test the long-held belief of foreign investors that China will treat them fairly. The result could further stimulate or reduce the flow of money into Chinese markets, when global confidence in China is already shaken.

“People will be watching closely to see if creditors’ rights are being respected,” said Dan Anderson, partner and restructuring specialist at law firm Freshfields Bruckhaus Deringer. “If they are respected, it will have long-term implications for investment in China.”

China needs investment from foreign investors now more than ever in its recent history.

Financial markets in mainland China and Hong Kong, which have been an entry point for foreign investment for years, have taken such a hit that officials are racing to find policy measures, such as a stock market rescue fund, to strengthen trust. And China’s property market shows few signs of returning to the boom days, in part because Beijing wants to redirect economic growth away from construction and investment.

Rising diplomatic tensions between the United States and China, which have led to large outflows of foreign money from China, are not helping.

Investors are awaiting the resolution of the Evergrande case to see how China will handle disputes involving its defaulting companies, of which there are dozens in the real estate sector alone.

Specifically, they want to see whether the people tasked with carrying out the settlement will be recognized by a court in mainland China, something that has historically not happened.

Under a mutual agreement signed in 2021 between Hong Kong and Beijing, a mainland Chinese court would recognize the Hong Kong court-appointed liquidator to allow creditors to take control of Evergrande’s mainland Chinese assets. But so far, only one of five such requests to local Chinese courts has been granted.

Monday’s decision, handed down by Judge Linda Chan, had already been delayed several times over the past two years as creditors and other parties agreed to delay to give the company more time to reach an agreement with creditors on how much they could be paid.

Until last summer, it appeared that Evergrande’s management team and some of its offshore creditors who had loaned the company money in US dollars in Hong Kong were reaching an agreement. Negotiations broke down in September when several high-ranking executives were arrested and eventually the founder and chairman, Hui Ka Yan, was detained by police.

The court’s decision on Monday was “a big bang,” Anderson said, which “will lead to something of a whisper as liquidators hunt for assets.”