The Evergrande Group’s winding-up order by a Hong Kong court on Jan. 29 could serve as a precedent to the restructuring required to clean up the excesses in the Chinese property market while protecting the interests of its foreign creditors, experts say.
The initial optimism of clearing out the dead wood to help the regime in Beijing contain a deepening crisis, however, is gradually giving way to a sobering reality check: Liquidating the world’s most indebted property developer could further erode confidence in China’s property and capital markets.
“The decision is credit negative for the broader property sector as it will weaken already-fragile investor and market sentiment [and] will likely affect homebuyers’ purchasing decisions in the near term,” Moody’s said in a report on Jan. 30 that was viewed by The Epoch Times.
While there have been instances of smaller Chinese developers going bankrupt in the past two years, China has no precedent of foreign creditors having direct control over or claims against a company’s onshore assets, according to the global ratings firm.
In addition, Evergrande has more onshore creditors with higher claim priority, which creates a situation in which the recovery of offshore creditors isn’t guaranteed.
Hence, the Hong Kong court’s order will be more challenging to implement because of Evergrande’s complicated organizational structure, which comprises several subsidiary companies that develop and fund property projects around the country.
“Overall, we expect the liquidation to take time,” the Moody’s note states.
The city’s High Court issued the liquidation verdict after the ailing Chinese real estate behemoth and its international creditors couldn’t reach an agreement on how to restructure its more than $330 billion in debt owed to banks, creditors, and bondholders despite 19 months of negotiations.
“It seems to me that the interests of the creditors will be better protected if the company is wound up by the court so that independent liquidators can take control over the company,” Judge Linda Chan said in the ruling published on Jan. 29.
Evergrande, the poster child for China’s property crisis, defaulted on its debt in 2021, sparking fears of contagion in the Chinese economy, which continues to suffer the consequences. The Shenzhen-based developer, which had total liabilities of 2.39 trillion yuan (about $333 billion) at the end of June last year, declared bankruptcy in New York in 2023.
Overseas creditors are owed $25 billion, according to a Hong Kong court document; one of them, Top Shine Global, filed a winding-up suit against Evergrande in Hong Kong in June 2022 to recoup a portion of its losses.
Yet, even after months of wrangling, the developer was unable to reach a deal with creditors, and its founder, Hui Ka Yan, was ultimately apprehended by Chinese authorities in September last year on suspicion of criminal activity.
Still, Bad News
Given that Hong Kong and some regions of China have a mutual agreement on bankruptcy and restructuring, this decision might allow the liquidators to try to take control of some Evergrande assets in mainland China.Evergrande Group is one of many Chinese developers, including the largest private developer, Country Gardens, that have failed since 2020 because of state pressure to rein in rising debt, which the regime sees as a danger to China’s sluggish economic development.
Reportedly, Chinese developers will need to repay $100 billion in maturing debts this year, while local governments’ finance arms—called local government finance vehicles—owe $650 billion.
The court judgment might also have consequences for other developers that are still in the midst of prolonged restructuring talks with offshore creditors.
“Onshore recognition of the Evergrande liquidator’s authority would be momentous [and] a true breakthrough. Let’s just say I don’t see it in the cards,” Brock Silvers, chief investment officer of Hong Kong private equity group Kaiyuan Capital, said in his LinkedIn post.
Mr. Silvers said he believes that the court’s decision is “bad news for all parties and another blow to confidence in China’s capital markets” because the wind-up order would mark the start of a multiyear, very costly process that is unlikely to result in a significant recovery.
Besides, in the wake of Beijing’s underwhelming economy, the worst housing market in nine years, and the stock market wallowing at five-year lows, any further blow to investor confidence could exacerbate the difficulties that China’s policymakers are already facing in their attempts to revive growth, experts say.
Chinese equities, which had endured a prolonged slide into bearish sentiments last year and even into the new year, still reflect acute pessimism.
According to Bloomberg, China’s capital market was valued at $13 trillion at its high in December 2021 but has shrunk by a third since then, shedding more than $1 trillion in total capitalization already this year.
The rout prompted Chinese Vice Premier He Lifeng on Jan. 29 to call for increased assistance for listed businesses to help stabilize markets, according to reports.
Meanwhile, Moody’s has warned that China’s slow growth and disinflationary pressure could persist if underlying economic issues worsen.
“Structural economic issues and slowing growth, if unmanaged, could result in an extended disinflationary or deflationary period,” the ratings firm said in a client note.
These structural challenges include industry overcapacity, subdued investment in industries, the prolonged property sector downturn, and challenges of promoting alternative growth engines.
“Structural deflation would increase debt burden costs, weaken consumption and investment sentiment, and further reduce aggregate demand, a credit negative to the sovereign,” the note said.
If China’s reforms don’t adequately address those challenges, the country may experience prolonged disinflation or perhaps deflation, Moody’s warned.
