“Enothing is enough,” a Hong Kong judge said on January 29 about Evergrande, a failing Chinese real estate giant, and its two-year battle to avoid having to pay back its creditors. In a landmark ruling, the court ordered the liquidation of the company, which is the world’s most indebted property developer, with more than $300 billion in debt. A provisional liquidator will be appointed to take charge of the company. Foreign creditors will have to make up for the losses of a company that keeps most of its assets in mainland China. The ruling thus pits Hong Kong’s courts against a Chinese government seeking to restore public confidence in a struggling market.
No company has played a more central role in China’s real estate crisis, which began in mid-2021 when Evergrande first showed signs of weakening. Rules intended to relieve developers of debt caused the company to default later that year. Since then, most listed real estate developers in China have failed to pay back their investors or have been forced to restructure. Their access to credit has been virtually cut off, meaning builders have stopped working on projects. Potential homebuyers have postponed their purchases, leading to a 6.5% decline in sales values year over year and unnerving a population that keeps most of its wealth in real estate.
Policymakers had hoped that Evergrande’s restructuring would pave the way for a steady revitalization of the market. Instead, Evergrande missed key deadlines and disappointed investors when it made a restructuring proposal. The plan, which was rejected by bondholders, would have given creditors a stake in some of its other businesses, such as an electric vehicle line. Instead of restoring confidence, the battle became increasingly fierce. At one point, a group of bondholders demanded that Hui Ka Yan, Evergrande’s chairman, inject $2 billion of his own money. Mr Hui was later detained by Chinese authorities. His whereabouts are now unknown.
China’s housing crisis has eroded global investors’ confidence in the country’s policymaking. It is now causing similar damage in Hong Kong. For decades, investors have reached China through Hong Kong. One of the city’s distinguishing features is a legal system, separate from that of China, that is based on customary law. But court rulings in Hong Kong offer no guarantee that they will be enforced in mainland China, where almost all of Evergrande’s assets are based.
The receiver appointed by a Hong Kong court will be forced to deal with local authorities who may not recognize an order made outside the Chinese legal system. Although a pilot project to recognize cross-border judgments was set up in 2021, the qualification requirements are strict and the scheme is only recognized in a few cities. Rulings from Hong Kong can easily be dismissed by the mainland courts if they have the potential to disrupt public order.
As Tommy Wu of Commerzbank, a German lender, has written, a complete liquidation of Evergrande’s Chinese assets would likely send shockwaves through the Chinese economy. Property developers have sold properties to ordinary Chinese who have not yet made them available. Investors’ claims on Evergrande’s projects or the cash positions the company still has could hinder delivery. This would run counter to Beijing’s efforts to restore market confidence and would almost guarantee that the liquidation process would take a long time.
Hong Kong’s ruling leaves room for restructuring, with the judge noting that Evergrande can still offer it to creditors. The company says it wants to draw up a new plan. Because a curator is taking over, the chance of a deal is now greater. But it will not be a country that includes many Chinese assets. And for a company that mainly owns Chinese real estate, that is a problem. The liquidation of Evergrande marks a new low in the Chinese real estate crisis – and is far from the end of it. ■
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