More than two years after the massive property developer Evergrande first acknowledged that it couldn’t meet its $300 billion in liabilities, a Hong Kong court has finally ordered the company’s liquidation.
The action made headlines around the world, along with much speculation about what comes next.
The company’s stock in Hong Kong promptly fell by 20 percent on the news. Practically speaking, the answer to the question of what happens next is rather straightforward: Not much will change. What a Hong Kong court says means little to what will happen in the rest of China, where the bulk of Evergrande’s assets reside. Nor does it have much effect on overseas jurisdictions. Meanwhile, none of the legal machinations do anything to alleviate China’s considerable economic and financial problems with property and generally.
After months of delays during which Evergrande’s management and lawyers promised an effective reorganization, Justice Linda Chan, speaking for the Hong Kong courts on Jan. 29, said, “Enough is enough” and ordered the company’s liquidation.
Now, provisional liquidators will take over the management of the company in Hong Kong, take control of its assets in the jurisdiction, and begin negotiations with the company’s creditors on a debt restructuring. As is the case with most bankruptcies, the moves will create little change in Evergrande’s daily activities. Overseas matters will remain unsettled.
Meanwhile, the bulk of Evergrande’s assets—some 90 percent according to the Hong Kong court’s estimates—lies in mainland China, outside Hong Kong’s jurisdiction. The disposition of those assets awaits a determination on an application for assistance filed by Hong Kong’s liquidators in Shanghai, Shenzhen, and Xiamen. In other words, a great deal remains unsettled.
However much this decision might gratify Hong Kong claimants who now have a chance of getting at least some of their money back, most of Evergrande’s creditors and customers, those who put money down on apartments that Evergrande never completed, remain in the same limbo they have suffered now for more than two years.
And even if the courts in China were to make a speedy resolution, Evergrande’s failure will continue to hang over China’s property sector and financial sector generally. Those who paid for apartments that remain unfinished will continue in straitened financial circumstances, and much of Evergrande’s debt will remain unpaid, as will the debts of other property developers that have followed Evergrande’s path to failure, Country Garden prominent among them.
Because of this, Beijing will continue to face huge economic and financial problems. The prevalence of so much questionable debt has limited the ability of Chinese finance to offer the economy the once-great support it did when property development constituted nearly 30 percent of all economic activity.
And it isn’t just the debts of developers and their customers. Local governments were heavily involved in property development and lost a lot of revenue in the collapse. Consequently, they have also found it difficult to meet their own financial obligations, adding to the weight of questionable debt holding Chinese finances back.
Moreover, the collapse of the development firms and the fate of buyers who prepaid for apartments that may never become available has turned off millions of potential Chinese homebuyers, further depressing this once-important sector. According to China Real Estate Information, the 100 largest developers saw a 34 percent drop in home sales in January from the same time last year. Meanwhile, real estate values continue to fall. Because of price controls, the official figures do not look too bad, but behind them, those at Goldman Sachs close to the situation estimate a 20 percent price drop. The attendant loss of household net worth has stifled consumer spending.
Against the weight of these troubles, Beijing’s response to date can only be described as paltry. Had the authorities acted promptly—such as by providing special lending to enable a firm to complete the prepaid apartments—to blunt the effect of these failures when Evergrande first announced its inability to meet its obligations, the financial shortfalls might not have built on themselves as they have. But Beijing dithered.
Now, in 2024, after the problems have festered for years, Beijing seems unable to muster a forceful enough program to deal with a matter that has grown larger in the interim. The People’s Bank of China has cut interest rates, but hardly enough to make much of a difference. The rate declines have not even kept up with the deflation that China has begun to suffer. Beijing has told the state-owned banks to lend developers enough to complete the apartments, but the bankers are clearly reluctant. The authorities have also earmarked the equivalent of $49 billion to build low-cost housing, which hardly seems enough to turn things around given that Evergrande alone failed on some $300 billion in commitments.
Outside of real estate, China’s economy has shown only slight signs of improvement. Without more decisive action from Beijing, it is doubtful that the economy will get better any time soon, certainly not in the property sector. Recognizing these facts, the International Monetary Fund has reduced its expectations of real economic growth in China this year to 4.6 percent, down from 5.2 percent in 2023—and many doubt that figure. The World Bank has reduced its expectations to 4.5 percent real growth this year and 4.3 percent next year. These figures may be optimistic.
