Evergrande's liquidation could derail the Chinese economy and have global effects

Evergrande's liquidation could derail the Chinese economy and have global effects 

By business reporter Nassim Khadem and wires

AHong Kong court has ordered one of China's biggest property developers, Evergrande Group, to liquidate after it was unable to reach a restructuring deal with creditors over hundreds of billions of dollars it owes.

The liquidation could have severe consequences for the world's second-largest economy, as the Chinese property sector continues to struggle to recover from the pandemic and Beijing grapples with an underperforming economy.

A sharp slowdown in the Chinese property sector — which accounts for about 30 per cent of China's economic growth — could also have damaging consequences for Australia. 

A crackdown three years ago by China on real estate speculation caused a property crisis and left Evergrande owing $US300 billion ($455 billion).

Months later, the firm defaulted on its offshore debt obligations, and a proposal to restructure its debt was rejected last month by creditors.

The winding-up hearing was pushed to January after Evergrande's lawyers argued that none of its creditors were seeking the liquidation of the firm, which has $US240 billion of assets.

But High Court Judge Linda Chan issued the liquidation order on Monday after Evergrande was unable to come up with a restructuring plan that would satisfy its international creditors.

"It would be a situation where the court says enough is enough," Judge Chan said.

"I consider that it is appropriate for the court to make a winding-up order against the company, and I so order."

Will there be further lawsuits?

The liquidator will now attempt to take control of Evergrande assets outside China, but there are fears that could pave the way for other lawsuits.

Trading was halted in the Hong Kong-listed shares of Evergrande and two of its subsidiaries after the ruling.

Evergrande's shares were trading down as much as 20 per cent before the hearing.

"Evergrande's liquidation is a sign that China is willing to go to extreme ends to quell the property bubble," said Andrew Collier, managing director of Orient Capital Research in Hong Kong.

"This is good for the economy in the long term, but very difficult in the short term."

Redmond Wong, chief China strategist at Saxo Markets in Hong Kong, said for Evergrande shareholders in Hong Kong "the likelihood of getting anything out of the winding up process is very low".

He said the winding up of Evergrande's Hong Kong listing entity has been widely anticipated and should not impact the general market much.

"The restructuring and winding up of developers are necessary for cleaning up the excesses in the Chinese property sector," he said.

But Kenny Ng, a securities strategist at China Everbright Securities in Hong Kong, said the liquidation "may further impact the confidence of mainland creditors and increase the difficulty of Evergrande's restructuring in mainland China".

"At the same time, this may also affect investors' confidence in the mainland real estate industry and the willingness of mainland residents to purchase properties," he said.

"This has the potential to have a dampening effect on the economy and the capital market."

Will China recognise and enforce Hong Kong court decision?

Whether offshore creditors can apply for the sale of Evergrande's assets in mainland China will depend on whether the mainland courts recognise or enforce the winding-up order from Hong Kong.

It could take years for the offshore liquidator appointed by the creditors to take control of subsidiaries across mainland China.

"If recognised or enforced, offshore creditors have a chance to claim for the assets in the mainland," Mr Ng said.

"Otherwise, they can only apply for the liquidation of assets in Hong Kong."

The liquidation petition was first filed in June 2022 by Top Shine, an investor in Evergrande unit Fangchebao which said the developer had failed to honour an agreement to repurchase shares it had bought in the subsidiary.

Evergrande had been working on a $US23 billion debt revamp plan with a group of creditors, known as the ad hoc bondholder group for almost two years.

Its original plan was derailed in late September when Evergrande said its billionaire founder Hui Ka Yan was under investigation for suspected crimes.

Speaking outside the courtroom after the hearing, Fergus Saurin, a partner at law firm Kirkland and Ellis, which represents a key group of Evergrande creditors, said: "We are not surprised by the outcome. It's a product of the company failing to engage with [us].

"There has been a history of last-minute engagement which has gone nowhere. And in the circumstances, the company only has itself to blame for being wound up."

Other developers including Country Garden, China's largest real estate developer, have also run into trouble. The impact has been felt throughout the financial systems inside and outside China.

The Reserve Bank in a recent financial stability review, warned that problems stemming from the "sharp deterioration" in China's property sector could lead to a global slowdown, weaker commodity prices and "reduced Chinese imports of Australian goods and services".