Liquidating Evergrande: Sobering Reality Hits China’s Property Sector

News AnalysisThe Evergrande Group’s winding-up order by a Hong Kong court on Monday 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, according to experts.The initial optimism of clearing out the deadwood to help Beijing contain a deepening crisis, however, is gradually giving way to a sobering reality check: liquidating the most indebted property developer could further erode the 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,” said Moody’s in a report on Tuesday and viewed by The Epoch Times.According to the global ratings agency, while there have been instances of smaller Chinese developers going bankrupt in the past two years, China has no precedence of foreign creditors having direct control over or claims against a company’s onshore assets.In addition, Evergrande has more onshore creditors with higher claim priority, which creates a situation where the recovery of offshore creditors is not guaranteed in comparison to onshore creditors.Related StoriesHence, the Hong Kong court’s order will be more challenging to implement owing to 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 said.The city’s High Court issued the liquidation verdict after the ailing Chinese real estate behemoth and its international creditors could not reach an agreement on how to restructure its over $330 billion debt due 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 Monday.Evergrande, the poster child for China’s property crisis, defaulted on its debt in 2021, sparking fears of contagion in the Chinese economy, which still suffers the consequences. The Shenzhen-based developer, which has 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, and 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.“The liquidation of Evergrande is [therefore] necessary in the broader context of rectifying the imbalances within China’s property sector,” noted Diana Choyleva, founder and chief economist at Enodo Economics, in a LinkedIn post.Still, Bad NewsGiven that Hong Kong and some regions of China have a mutual agreement on bankruptcy and restructuring, this decision might theoretically 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 due to state pressure to rein in rising debt, which Beijing 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 could 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,” said Brock Silvers, chief investment officer of Hong Kong private equity group Kaiyuan Capital, in his LinkedIn post.Mr. Silvers 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 pessi

Liquidating Evergrande: Sobering Reality Hits China’s Property Sector

.

News Analysis

The Evergrande Group’s winding-up order by a Hong Kong court on Monday 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, according to experts.

The initial optimism of clearing out the deadwood to help Beijing contain a deepening crisis, however, is gradually giving way to a sobering reality check: liquidating the most indebted property developer could further erode the 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,” said Moody’s in a report on Tuesday and viewed by The Epoch Times.

According to the global ratings agency, while there have been instances of smaller Chinese developers going bankrupt in the past two years, China has no precedence of foreign creditors having direct control over or claims against a company’s onshore assets.

In addition, Evergrande has more onshore creditors with higher claim priority, which creates a situation where the recovery of offshore creditors is not guaranteed in comparison to onshore creditors.

Hence, the Hong Kong court’s order will be more challenging to implement owing to 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 said.

The city’s High Court issued the liquidation verdict after the ailing Chinese real estate behemoth and its international creditors could not reach an agreement on how to restructure its over $330 billion debt due 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 Monday.

Evergrande, the poster child for China’s property crisis, defaulted on its debt in 2021, sparking fears of contagion in the Chinese economy, which still suffers the consequences. The Shenzhen-based developer, which has 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, and 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.

“The liquidation of Evergrande is [therefore] necessary in the broader context of rectifying the imbalances within China’s property sector,” noted Diana Choyleva, founder and chief economist at Enodo Economics, in a LinkedIn post.

.

Still, Bad News

Given that Hong Kong and some regions of China have a mutual agreement on bankruptcy and restructuring, this decision might theoretically 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 due to state pressure to rein in rising debt, which Beijing 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 could 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,” said Brock Silvers, chief investment officer of Hong Kong private equity group Kaiyuan Capital, in his LinkedIn post.

Mr. Silvers 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 one-third since then, shedding more than $1 trillion in total capitalization already this year.

The rout prompted Chinese Vice Premier He Lifeng on Monday to call for increased assistance for listed businesses in an effort 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 agency 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 do not adequately address these challenges, the country may experience prolonged disinflation or perhaps deflation, Moody’s warned.

.