China: Evergrande Ordered to Liquidate Amid Property Crisis

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Facts

• On Monday, Hong Kong's High Court ordered Evergrande Group, China's struggling real estate giant, to liquidate its operations after it failed to reach an agreement on how to restructure its vast debt.¹
• The property sector accounts for nearly 25% of China's economy and Evergrande's default in 2021 sent shockwaves through international financial markets, leaving it to owe more than $300B. Judge Linda Chan ordered the seizure and sale of the company's assets to satisfy outstanding debts after it failed to devise an acceptable debt restructuring plan.²
• Following the court order, the company's shares experienced a 20% drop in the Hong Kong market before trading was suspended. According to Siu Shawn, the CEO of Evergrande, the injunction won't have an impact on the business's operations in mainland China or its other offshore divisions outside of Hong Kong.³
• Chinese regulators have said that Evergrande's failure is manageable, but there's a significant risk that the liquidation order will undermine the Chinese financial system as Evergrande attempts to hand over paid-for housing to families who invested their life savings. According to court documents, Evergrande owes foreign creditors $25.4B. Its liabilities exceed its assets, which total $240B. 'It is indisputable that the company is grossly insolvent and cannot pay its debts,' the documents say. ⁴
• As a former British colony, Hong Kong's common law system is distinct from communist-ruled China. It's unclear if mainland courts will recognize the insolvency and restructuring actions filed in Hong Kong. Analysts believe Evergrande will serve as a test case.⁵
• The failure of mainland China to recognize the liquidation order would result in substantial financial losses for foreign creditors with investments in Evergrande, likely undermining investor trust in the Chinese financial system.⁶

Sources: ¹CNN, ²BBC News, ³Independent, ⁴Associated Press, ⁵Al Jazeera and ⁶Yahoo Finance.

Narratives

• Anti-China narrative, as provided by Dw.Com. This is bad news for Beijing's leaders. Over the past two decades, China's real estate sector has been a major economic driver, but massive property speculation has fueled a huge real estate bubble that Beijing has been slow to resolve. Several smaller property developers have already been forced into bankruptcy, and Evergrande's liquidation order has the potential to destabilize China's entire financial system.
• Pro-China narrative, as provided by Globaltimes. There's still much uncertainty around Evergrande's liquidation procedure, but there has been quite a bit of media hype. The procedure will take months, if not years, but will most likely have a minor impact on the general market. The PRC's overall recovery in the real estate sector is still proceeding well, and the liquidation request is a common legal procedure in Hong Kong's legal system.

Predictions