A Hong Kong court on Monday ordered the liquidation of Chinese real estate giant Evergrande, which failed to present a convincing restructuring plan, a symbol of the sector’s woes in China.
“That’s enough !” thundered the judge in charge of the case on Monday morning. After almost two years of reprieve and negotiations with investors, magistrate Linda Chan whistled the end of the game. “Considering the obvious lack of progress (…) I consider it appropriate for the court to render a judgment for the liquidation of Evergrande, and this is what I order,” the latter ruled.
The decision responds to complaints from the group’s foreign investors who decided to take the matter to court after months of discussions. Although these international creditors only hold a tiny part of the group’s more than 300 billion francs of debt, the liquidation order obtained should in principle result in the seizure of all the company’s assets. Proceeds from their sale should be used to repay injured creditors.
Uncertain consequences in mainland China
If this verdict suggests the end of Evergrande, in reality, its application remains uncertain. The vast majority of the company’s assets are located in mainland China. Beijing could choose not to recognize the court decision. The Communist Party is in fact trying to gradually deflate a real estate bubble whose bursting would constitute a threat to the national economy.
To do this, the authorities are trying to keep developers afloat while they ensure the construction and delivery of apartments purchased off plan by thousands of Chinese households. A hasty liquidation would restrict power control in this process and contribute to increased anxiety among Chinese investors. Especially since around fifty promoters have recorded one or more payment defaults in recent months and are trying to negotiate the restructuring of their debts.
Dilemma for the Chinese authorities
Until 2021, the construction sector was one of the pillars of the Chinese economy. The real estate sector and related activities alone accounted for nearly 25% of gross domestic product.
A source of growth, the frenzy in the sector has long been encouraged by those in power, generating massive investments and speculation. From the beginning of the 2000s, many Chinese households invested their savings in the purchase of housing, an investment perceived as more stable and safer than the stock markets – which are very volatile in China. Faced with the explosion in demand, developers began to massively reinvest their income into new projects. The sale of goods before work even begins has gradually become widespread, exposing buyers to a significant risk of loss.
Eager to limit the expansion of the speculative bubble, the authorities have undertaken to restrain builders by imposing significant limits on their access to credit. Coupled with the economic slowdown, accentuated by the pandemic and the government’s draconian zero-Covid strategy, the measure has greatly affected entrepreneurs in the sector.
The sudden slowdown in household spending in recent years has also contributed to considerably reducing the income of developers. Result: many find themselves unable to honor their debts. A problem for more than 4,000 Chinese banks which would today be overexposed. Local authorities also find themselves closely linked financially to many players in the sector.
Michael Peuker