What next for Evergrande?

On Monday, 29 Janunary, a Hong Kong court ordered the liquidation of the world’s most indebted developer, China Evergrande Group.

“Enough is enough,” said Judge Linda Chan as part of her verdict, appointing New York-based management consulting firm Alvarez & Marsal (A&M) to carry out liquidation proceedings for the Guangzhou-based developer. A&M leaders said they would try to maximise how much of the company can be “retained, restructured, and remain operational.” Evergrande’s chief executive said his company would ensure that outstanding home projects are still delivered.

Evergrande, which has $300 billion in liabilities (equivalent to the GDP of South Africa), defaulted on its bond payments in 2021 and was unable to offer a concrete restructuring plan to offshore creditors despite 18 months of negotiations.

What comes next is the long and complex process of liquidation and restructuring, which is complicated by several factors:

• Evergrande’s vast real estate assets (around 1,000 projects) are mostly in mainland China. Therefore, their liquidation requires cooperation with Chinese courts in every city in which Evergrande has developments, as well as numerous government bodies. Previous cross-border liquidations instigated by Hong Kong courts have been challenging.
• Local governments in China may be unwilling to quickly sell the projects and hand over the money, and there is an added risk of social instability caused by incomplete or undelivered homes.
• The majority of Evergrande’s onshore assets have already been pledged as collateral to onshore creditors.
• Evergrande’s founder, Hui Ka Yan (Xu Jiayin in Mandarin) is being held under suspicion of involvement in “illegal crimes”, and its major subsidiary, Cheng Hengda Real Estate Group, is being investigated, which has limited the company’s ability to issue new debts and reach an agreement with creditors.

Commenting on the court’s decision this week, analysts have said that the news is unlikely to disturb Asian investors, as it was expected and is quite a unique case. As Focus has written before, while China’s property sector woes are serious, their potential impact on global markets should not be overstated, and China is highly unlikely to be facing a “Lehman moment” even if Evergrande collapses. Evergrande’s liquidation does, however, deal a fresh blow to the confidence of Mainland creditors and may increase the difficulty of its restructuring.

The verdict also deals a blow to the confidence of prospective home buyers and will deepen the trend of consumers not wanting to purchase homes from troubled (generally non-state-owned) developers. It could also lead to falling demand for construction materials and declining wages of employees in the property and government sectors if people stop investing in new homes.

It tells other struggling Mainland developers that the threat of liquidation is real and that China is serious about dealing with its property bubble. Debt restructuring certainly isn’t impossible; Business Insider reported that Debtwire data showed 32 developers in China managed to complete 42 restructuring processes worth $33.1 billion (£26.2 billion) between July 2021 and October 2023.

How China deals with the case will set a major precedent: Offshore investors will be keen to see how authorities treat foreign creditors when a company fails. Prompt recognition of the verdict by Chinese courts would boost Hong Kong’s status as a regional finance centre and a hub to invest in China.