waterfall effect? From ghost towns to bankruptcy: This is how the symbol of the Chinese real estate bubble shakes world finance. The Hong Kong High Court decided to liquidate Evergrande. The decision was taken due to the Chinese giant’s failure to submit a debt restructuring proposal worth over US$300 billion. What will be the impact of the decision on the global economy?

Evergrande’s time is up. The feared decision has come from the Hong Kong High Court: The decision to liquidate the Chinese real estate group, the world’s most indebted company. A new financial blow is falling on the real estate developer in China who is building literal ghost towns where apartments are forced to live in bare, empty houses that don’t even have windows. And not forgetting the huge number of unsold apartments: approximately 7.2 million houses throughout the People’s Republic. It was a situation that led to the real estate giant managing financial collapse and the anger of thousands of dissatisfied buyers.

Therefore, Hong Kong judge Linda Chan, who presided over the case, decided to issue a liquidation order on the morning of January 29, after Evergrande failed to submit its debt restructuring proposal worth more than US$300 billion on time. After marathon negotiations that ended in deadlock over the weekend, an agreement was reached with the main creditors.

What will happen now?

However, the Hong Kong High Court’s decision does not mean the end of Evergrande. The company may still appeal. The judge appointed restructuring consultancy Alvarez & Marsal, which has handled Lehman Brothers among its past cases, for liquidation, after issuing the liquidation order that set the stage for one of China’s largest insolvency cases. The advisory firm thus becomes Evergrande’s provisional liquidator, which will have to begin managing debt restructuring with creditors and take control of its assets, books and records.

However, Alvarez and Marsal will probably not be able to seize Evergrande’s shares in People’s Republic territory. Interjurisdictional difficulties arise before the court decision. Let’s clarify. Since the decision was made in Hong Kong (a different jurisdiction than China), seizing the company’s assets in China may require a separate legal decision that must be made in the People’s Republic courts. Therefore, there is a high probability that Chinese courts will refuse to recognize or assist Hong Kong liquidators in various ways in order to protect Chinese citizens who are primarily interested in the purchase of apartments whose work has not yet been completed.

The Hong Kong court’s decision will allow a liquidator to take control of Evergrande’s shares outside China. As the vast majority of assets are onshore, liquidators will need to assess whether there is value in these shares once priority creditors are satisfied. But it will take time, months or even years, for the offshore liquidator appointed by the creditors to gain control of the branches in mainland China.

Devin’s inability to get out of debt

How did the decision to liquidate the world’s most indebted real estate group come about? Let’s take a step back. Last August, giant Evergrande filed for bankruptcy in a New York court, seeking protection from creditors. Saddled with liabilities of US$333 billion, Evergrande has become a symbol of China’s real estate crisis, thus calling into question the unbridled growth of the real estate sector, which for decades has represented 20 percent of the People’s Republic’s GDP. The crisis in the industry in China has been evident for some time, and the Communist Party has taken action to slow down the freewheeling market. Initiatives implemented by President Xi Jinping, who introduced a law in 2020 to eliminate bank loans to heavily indebted Chinese developers, have allowed giants like Evergrande to survive on constant payments on maturing bonds and debt restructuring announcements. Evergrande’s problems worsened in 2021, with the giant defaulting several times, losing $81 billion in 2021 and 2022. An offshore debt restructuring plan was announced, but failed.

The liquidation application was filed in 2022 by offshore creditor Top Shine Global with the aim of recovering HKH862.5 million (US$110.4 million) from the failed investment made in Evergrande in March 2021. Initially, the negotiations seemed to have made the right decision. But they ran aground a few months later when several senior executives were arrested and company president Hui Ka Yan was also placed “under surveillance” by the police. Judge Linda Chan ruled that boss Hui Ka Yan, known as Xu Jiayin and who is under criminal investigation, will no longer control the company and that its overall management will be revamped in a bid to ease creditors’ fears.

What are the consequences for China and the global economy?

What will be the impact of the decision on the Chinese economy? Evergrande’s liquidation is likely to further reduce confidence in the struggling real estate market of the world’s second-largest economy and cause turbulence in the stock market, which the Chinese government has recently tried to stabilize again to boost the confidence of foreign investors. Analysts do not seem overly concerned, believing that the authorities will manage this purge in a way that does not have a serious contagion effect on other sectors of the economy.

In fact, the decision does not mean that Evergrande’s construction works will be stopped immediately. According to the real estate giant’s 2022 annual report, there are over 1,200 construction projects, some of which have not yet been completed. Not forgetting the large number of unsold flats. How many houses are we talking about? According to the latest data from China’s National Bureau of Statistics, the total area of ​​unsold houses at the end of last August amounted to 648 million square meters. According to Reuters calculations, this equates to 7.2 million homes based on the average apartment size of 90 square metres. The overwhelming amount of vacant apartments scattered across the country may not even be filled by all 1.4 billion Chinese people, a former Communist Party official noted in an article that appeared to be an apparent criticism of the real estate industry.

The decision was also reflected in the financial sector. Following the announcement, Evergrande Group’s shares on the Hong Kong Stock Exchange fell almost 21 percent, Evergrande New Energy Vehicle shares fell 18 percent and Evergrande Property Services Group Limited shares fell 2.5 percent. shares.

Source: Today IT