Months after China Evergrande ran out of cash and defaulted on its debts in 2021, investors around the world are discounting the property developer, betting that the Chinese government will eventually step in to bail it out. I obtained a loan deed.
On Monday, it became clear just how wrong that bet was. After a two-year impasse with more than $300 billion in debt, Evergrande has been ordered by a Hong Kong judge to liquidate, setting off a race for lawyers to scour Evergrande for salable assets. It will begin.
In a small courtroom on the 12th floor of Hong Kong's High Court building, Evergrande's lawyers pressed for a last-minute agreement. They argued that liquidation would negatively impact Evergrande's business and would not help creditors recover their funds. They wanted more time to try to negotiate a deal with Evergrande's creditors.
However, after 40 minutes of arguments, Linda Chan, the bankruptcy judge presiding over the case, ordered Evergrande to proceed with the business, citing the company's inability to submit a concrete proposal to the court for a year and a half. The decision was made to issue a cease and desist order. Year.
“I think there will be a situation where the court says enough is enough,” Chan said.
The order means Evergrande has been limping around for two years, unable to repay its debts and continuing to operate despite normal functioning. Upcoming projects spanning hundreds of cities and electric vehicle companies.
The order sent shockwaves through the Hong Kong-listed company's shares, causing them to drop more than 20% before trading was halted. The court's ruling is likely to reverberate in China's beleaguered real estate sector and in financial markets already nervous about the country's economy.
There is still little of value left in Evergrande's vast empire. And because Chinese property is intertwined with politics, valuable assets could be off-limits.
Like Evergrande and other developers, it overbuilt and overpromised, leaving hundreds of thousands of homebuyers waiting for rooms while extorting money on unfinished apartments. Dozens of these companies have defaulted on their debts, the government is desperately trying to force the apartments to be completed, and contractors and builders are in a difficult position as they have not been paid for years. There is.
What happens next with Evergrande's unwinding will test foreign investors' long-held belief that China will treat them fairly. The results could help stimulate or further curb capital flows into the Chinese market at a time when global confidence in China is already wavering.
“People will be watching closely to see if creditor rights are being respected,” said Dan Anderson, a partner and restructuring expert at law firm Freshfields Bruckhaus Deringer. “Whether they are respected will have long-term implications for investment in China.”
China needs investment from foreign investors more than ever in recent history.
Hong Kong's financial markets, long a gateway to mainland China and foreign investment, have been hit hard, and officials are scrambling to find policy tools such as a stock market rescue fund to restore confidence. . On Sunday, they moved to halt short selling, which allows investors to bet on stocks.
China's housing market shows little sign of returning to boom times, in part because the Chinese government wants to redirect economic growth to construction and investment.
Escalating diplomatic tensions between the US and China, leading to large outflows of foreign currency from China, are not helping.
Investors will be watching for a resolution to the Evergrande lawsuit and how China handles disputes over dozens of struggling companies in the real estate sector alone.
Specifically, it wants to determine whether the people currently tasked with carrying out the liquidation will be admissible in mainland Chinese courts, something that has not happened historically.
Under a reciprocal agreement signed in 2021 between Hong Kong and Beijing, mainland courts will approve Hong Kong court-appointed liquidators and allow creditors to take control of Evergrande assets located in mainland China. Become. However, so far only one in five such requests before Chinese local courts have been granted.
Monday's decision had already been postponed multiple times over nearly two years, as creditors and other parties agreed to postpone it to give the company time to reach an agreement with creditors on how much it would pay. was.
As recently as last summer, Evergrande's management and some of the foreign creditors in Hong Kong that had lent the company money in US dollars appeared to be close to a deal. Talks were hit by a brake in September when several senior executives were arrested and eventually founder and chairman Hui Kar Yan was detained by police.
Mr Anderson said Monday's court ruling was a “big bang” and “will bring some kind of scream as liquidators go after the assets”.
Lawyers representing major creditor groups told reporters outside court on Monday that they were not surprised by Chan's ruling.
“We are ready, willing and able to go through the entire process of reaching an agreement with the company,” said Fergus Solin, a partner at Kirkland & Ellis who is advising creditors. Stated. “There is a history of last-minute commitments that go nowhere, and in this situation the company is solely responsible for being terminated.”
