Months after China Evergrande ran out of cash and defaulted in 2021, investors around the world snapped up the property developer's discounted notes, betting that the Chinese government would eventually step in to bail it out.
On Monday it became clear how wrong that bet was. After two years in limbo, a Hong Kong court ordered Evergrande into liquidation, a move that will trigger a race by lawyers to find and seize anything belonging to Evergrande that can be sold.
The order is also likely to send shock waves through financial markets already nervous about China's economy.
Evergrande is a real estate developer with a debt of more than $300 billion and is in the midst of the largest real estate crisis in the world. There's not much left in his expanding empire that's worth much. And even those assets may be prohibited because ownership in China has become intertwined with politics.
Evergrande, as well as other developers, overbuilt and overpromised, taking money for apartments that had not been built and leaving hundreds of thousands of homebuyers waiting for their apartments. Now that dozens of these companies have defaulted, the government is desperately trying to force them to finish the apartments, putting everyone in a difficult position because contractors and builders have not been paid for years.
What happens next with Evergrande's liquidation will test foreign investors' long-held belief that China will treat them fairly. The result could help stimulate or further slow the flow of money into Chinese markets when global confidence in China is already faltering.
“People will be looking closely at whether creditor rights are respected,” said Dan Anderson, partner and restructuring specialist at law firm Freshfields Bruckhaus Deringer. “If they are respected it will have long-term implications for investment in China.”
China needs investment from foreign investors now more than ever in its recent history.
Financial markets in mainland China and Hong Kong, which have been an entry point for foreign investment for years, have taken such a hit that officials are scrambling to find policy measures such as a stock market rescue fund to shore up confidence. . And China's property market shows few signs of returning to boom days, in part because Beijing wants to redirect economic growth away from construction and investment.
Rising diplomatic tensions between the United States and China, which have led to large outflows of foreign money from China, are not helping.
Investors are awaiting the resolution of the Evergrande case to see how China will handle disputes over its defaulting companies, of which there are dozens in the real estate sector alone.
Specifically, they will want to see whether the people now tasked with carrying out the liquidation will be recognized by a mainland court, something that historically has not happened.
Under a mutual agreement signed in 2021 between Hong Kong and Beijing, a mainland Chinese court would recognize the liquidator appointed by the Hong Kong court to allow creditors to take control of Evergrande's assets in mainland China. But so far only one in five such requests before local Chinese courts have been granted.
Monday's decision, handed down by Judge Linda Chan, had already been delayed several times in the past two years, as creditors and other parties agreed to adjourn to give the company more time to reach an agreement with creditors. about how much they could be paid. .
As recently as last summer, it appeared that Evergrande's management team and some of its offshore creditors who had lent the company money in US dollars in Hong Kong were getting closer to a deal. Talks stalled in September when several high-level executives were arrested and founder and president Hui Ka Yan was eventually detained by police.
Monday's court decision was “a big bang,” Anderson said, which “will lead to a bit of a whimper as liquidators go after assets.”
