There are so many problems with the Chinese economy and real estate sector that it becomes easy to both overstate and understate the importance of events. Understanding events as they unfold directs the analytical framework, so it is essential to tune our understanding of the recent order of liquidation by a Hong Kong court on Evergrande.
The Hong Kong court ordered the liquidation of China Evergrande, which is a Hong Kong-listed company. China Evergrande is a real estate-focused firm that is part of the Evergrande Group conglomerate based in China. Notably, the liquidation order does not apply to the Evergrande Group or its other listed entities. Given that China Evergrande is only responsible for about one-third of Evergrande Group assets, even if it was liquidated, it is unclear what effect this would have on the larger Evergrande Group.
More importantly, there is little evidence that mainland Chinese courts will accept judicial decisions from a Hong Kong court. A recently announced agreement between China and Hong Kong specifically excluded cross-border judicial decisions on corporate insolvency. Some cities like Shenzhen and Shanghai have agreements with Hong Kong to accept judicial decisions. Still, in practice, only a few decisions from Hong Kong have actually been accepted in those cities, so the outcome remains decidedly unclear.
Interestingly, international media has failed to cover the plaintiff requesting the winding up of Evergrande. Chinese media reports that a 30-year-old Guangdong native, who attended university in California and resides in Hong Kong, is the primary litigant against Evergrande. Involved in multiple groups and having started his own securities firm, it remains unclear how he could be at the center and who he represents.
The primary question is what this means for a heavily indebted China and the real estate sector at large. Given Beijing’s rolling out of policies to support the real estate sector—such as funding to real estate firms and owners looking to buy homes and relaxing loan and ownership restrictions—it seems unlikely that China will look to actively and rapidly act upon a Hong Kong court order.
If Evergrande disposes of assets to satisfy the liquidation order, given the mysterious litigation representation, it seems likely that the disposal of assets is more to help politically favored firms or individuals. Evergrande was known for overpaying for the best locations in major cities. Absent political support on the mainland to liquidate Evergrande assets to politically favored parties, any action seems likely to be slow, if it is recognized at all.
There is another reason Evergrande matters. Many real estate development firms facing significant financial difficulty look at Evergrande as the blueprint for any process they might face. It is worth remembering that Evergrande stopped paying its debts more than two years ago and calculated financial debts of approximately $300 billion and cash of only $10 billion in recent financial disclosures.
While these financial reports should not be taken as definitive due to Chinese accounting and reporting standards, they speak to the problems facing Evergrande and the broader real estate market. Property developers will only be able to accrue cash by selling assets when transactions and prices are falling. In short, Evergrande, to date, provides no blueprint for other firms, even though many want it to.
Despite all the headlines of liquidation and asset sales, the reality is there is no strong evidence or legal precedent for a Hong Kong court to force mainland sales on a case of this size. The most likely scenario is drawn-out proceedings that take it out of the public eye, with some asset disposals to state-owned developers as likely. However, there is likely to be little change in the short run.
