The current situation on China’s Evergrande saga

China Evergrande Group, once the world’s most indebted property developer, is facing a possible liquidation as early as Monday, January 29, 2024. A court in Hong Kong will hear a winding-up petition against the firm by foreign creditors, who are seeking to recover their money from the company’s $300 billion debt pile.

Evergrande has been struggling to survive since 2021, when a crackdown by the Chinese government on excessive borrowing in the real estate sector triggered a liquidity crisis for the firm. Evergrande defaulted on its offshore debt obligations in late 2021 and failed to reach an agreement with its creditors on a debt restructuring plan in December 2021.

The winding-up petition was filed by Top Shine, a Samoa-registered investor in one of Evergrande’s subsidiaries. A group of offshore bondholders also plans to join the petition to liquidate the company’s assets, according to Reuters.

Evergrande’s lawyers have argued that none of its creditors are seeking the liquidation of the firm, which has $240 billion of assets. But the judge warned that the most recent hearing would be the last before a decision was made on whether to issue the winding-up order, in the absence of a “concrete” restructuring plan.

A liquidation of Evergrande could have far-reaching consequences for China’s economy and financial system, as well as for global markets.

Evergrande is not only a major player in China’s property market, which accounts for about 25% of the country’s GDP, but also a large employer and a source of funding for many other businesses. A disorderly collapse of Evergrande could trigger a chain reaction of defaults, bankruptcies and social unrest among its suppliers, contractors, homebuyers and employees.

However, a liquidation of Evergrande is not a foregone conclusion. The case is being seen as a test of whether a winding-up order issued in Hong Kong would be recognized in mainland China.

Hong Kong’s system of common law, which has remained in place after the former British colony was returned to China in 1997, is preferred by foreign creditors when it comes to recovering debts in the mainland.

Beijing agreed two years ago to recognize Hong Kong insolvency orders in the Chinese cities of Shenzhen, Shanghai and Xiamen. But in practice, liquidation orders have been difficult to pull off due to China’s opaque legal system.

Mainland courts have, to date, only recognized one such order, and have the ability to use their discretion over whether recognition is warranted. If the order is accepted by a Chinese court, Evergrande would be placed in the hands of liquidators who would then try to sell off its assets to pay its creditors. The liquidators could propose a new debt restructuring plan to offshore creditors if they determined the company had enough assets.

Alternatively, Evergrande could still reach a deal with its creditors before or after the winding-up hearing or seek protection from mainland courts under China’s bankruptcy law.

The Chinese government could also intervene to prevent a systemic crisis, either by providing direct or indirect support to Evergrande or by facilitating an orderly resolution of its debt problems. The government has so far adopted a cautious approach, balancing its desire to maintain financial stability with its goal of deleveraging the property sector and curbing moral hazard.

The outcome of Evergrande’s saga will have significant implications for China’s economic growth, financial stability and social stability in 2024 and beyond. It will also affect the confidence and expectations of investors, consumers and policymakers around the world. Evergrande’s fate is not only a matter of corporate survival, but also a test of China’s economic resilience and reform.