The heavily indebted construction company Evergrande has become a symbol of the Chinese real estate crisis. A Hong Kong court has now ordered the company to be dissolved. What follows from this?
“Enough is enough,” said Judge Linda Chan when announcing the verdict. After a year and a half of hearings, Evergrande has still not managed to make a concrete proposal on how the company should be restructured. At the beginning of December, the judge granted the company a reprieve to ward off the threat of liquidation. This deadline has now passed.
“The court decision does not come as a surprise,” says Jörg Wuttke, former, long-time president of the European Chamber of Commerce in China. With 300 billion in debt in US dollars, Evergrande has accumulated a debt base similar to that of Greece 10 years ago. “There was no good restructuring plan and now we have to see where the journey takes us.”
Real estate company with the highest debt in the world
Evergrande boss Xiao En told Chinese state media that he regretted the decision. It is not in the interests of the company.
Evergrande is the most indebted real estate company in the world. Until recently, the company had tried in vain to convince everyone involved to get more time to pay off its debts. Of the approximately $300 billion in debt alone, $22.7 billion was taken out abroad.
Does the ruling also apply in mainland China?
Following the court ruling, the provisional insolvency administrators are now conducting negotiations with the creditors. It is not yet clear what specific impact the ruling will have. Although Evergrande is listed on the stock exchange of the Chinese Special Administrative Region of Hong Kong, the largest construction activity is in mainland China. These are two different legal areas. It is not yet possible to predict to what extent the processors will also have access to mainland China.
It’s very complicated, says Simon Lee, financial analyst and Evergrande expert from the Chinese University of Hong Kong. “Whenever there is a dispute, both Hong Kong and mainland jurisdictions are involved. With an ordered liquidation, it’s just difficult how that is implemented in mainland China,” he says.
Impact on the economy
Like many other experts, Simon Lee does not assume that the liquidation of Evergrande will have an impact on the global financial markets like the financial crisis of 2008. However, it will have an impact on the economic growth of the world‘s second largest economy. The financial analyst estimates that the dissolution of Evergrande could cost China 0.5 percent of gross domestic product this year. The number also depends on what measures the Chinese government now takes to strengthen confidence in the crisis-ridden real estate market.
The Chinese real estate sector used to account for up to a third of the economy, but is now in crisis with several highly indebted construction companies. The demand for new properties in China has recently decreased significantly.
Wuttke sees a need for action from the government
There are millions of ruined buildings and apartments that have not been completed by construction companies, but into which Chinese families have invested a large part of their savings in advance. Some people now live in unfinished buildings without electricity or running water because they have nothing else. Wuttke sees a great need for action by the Chinese government.
“If this is not addressed, then trust will certainly wane,” he says. Trust in the real estate market is much more important in China than in Germany. “At least two thirds of a normal Chinese family’s wealth is in the Chinese real estate sector. In Germany that’s just 25 percent,” explains the former president of the EU Chamber of Commerce.
After the court’s announcement, Evergrande shares on the Hong Kong stock exchange fell more than 20 percent. A little later, the stock exchange stopped trading in Evergrande securities. The securities of the electric vehicle subsidiary are also suspended from trading.
Eva Lamby-Schmitt, ARD Shanghai, tagesschau, January 29, 2024 9:18 a.m