June 21, 2024

What if the property giant is liquidated? – DW – 01/28/2024

Troubled property developer China Evergrande could be liquidated as early as Monday, as a court in Hong Kong hears a winding-up petition against the firm by foreign creditors.

The legal proceedings are being brought by Samoa-registered Top Shine, an investor in one of Evergrande’s subsidiaries.

Reuters news agency reported this week that a group of offshore bondholders also plans to join the petition to liquidate the company’s assets.

A crackdown three years ago by China on two decades of real estate speculation caused a deepening property crisis and left Evergrande owing $300 billion (€277 billion).

Months later, the firm defaulted on its offshore debt obligations, and a proposal to restructure its debt was rejected last month by creditors.

The winding-up hearing was pushed to January after Evergrande’s lawyers argued that none of its creditors were 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.

In a sign that liquidation is imminent, Bloomberg News reported this week that the court is set to seek a potential regulating order on Monday.

Legal experts are unsure whether any ruling made in Hong Kong will be recognized in mainland ChinaImage: Vernon Yuen/picture alliance /AP

What would happen if Evergrande is liquidated?

Firstly, 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.

They would also investigate the company’s affairs and could refer any suspected misconduct to Hong Kong prosecutors.

Several other Chinese developers are facing winding-up orders in Hong Kong courts in the coming months.

How China’s economic slowdown is rippling across Asia

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What would be the impact on the Chinese economy?

The liquidation of Evergrande would be a major setback for the world’s second-largest economy, already struggling to recover from a draconian zero-COVID policy that kept much of the country in lockdown during the pandemic.

China’s real estate sector has been a major engine of growth over the past two decades, helping Beijing’s leaders to achieve double-digit economic growth at times.

In comparison, the Chinese economy grew just 5.3% last year, thanks in part to weaker exports and domestic demand, high youth unemployment and the worsening real estate crisis.

In recent years, however, several other property developers have been forced into bankruptcy while spending by construction firms has dropped by 10% annually for two years running.

Last year, sales of new homes from the 100 biggest real estate firms fell by more than a third, to 451.3 billion yuan ($64 billion, €59 billion).

The country’s local governments, which rely on land sales for property to boost their budgets, are also heavily indebted and have been forced to cut spending.

Much of the $300 billion owed by Evergrande was deposits paid by ordinary Chinese citizens on new-build apartments.

It is unclear whether they will be prioritized during any liquidation over foreign creditors.

Most economists are already forecasting that China will grow more slowly in 2024. A worsening real estate crisis could weaken demand further and rock the country’s financial system.

Last month, Oxford Economics estimated that it would take four to six years to complete all the unfinished residential properties.

Fortunes have been won and now lost betting on the future value of Chinese propertyImage: picture alliance / CFOTO

Why is China’s real estate sector in trouble?

China is a nation of homeowners. Some 80% of households own their homes and more than 20% of urban households own multiple properties.

Over the past two decades, Chinese consumers poured their savings into property investment, helping developers’ profits to skyrocket.

The speculation pushed real estate prices to unaffordable levels. By 2021, the average new urban dwelling unit cost nearly 10 times the average salary.

The massive real estate bubble was allowed to fester for too long before Beijing took action, many economists say.

In August 2020, in the middle of the pandemic, Chinese President Xi Jinping announced new limits on the amount of debt that developers like Evergrande could amass.

Xi’s so-called three red lines meant that firms had to ensure their liabilities didn’t exceed 70% of assets, that net debt remained below 100% of equity and that financial reserves stayed at 100% of short-term debt.

The new curbs laid bare the scale of what has been referred to as a huge Ponzi scheme that Evergrande had been operating. For years, the company had been using deposits on future real estate developments to fund current construction projects.

Edited by: Kristie Pladson

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