A Hong Kong court on Monday ordered the liquidation of China’s real estate behemoth Evergrande, but the company claimed it would continue to function in a case that has become a symbol of the country’s worsening economic troubles.
Once China’s largest real estate company, its colossal debt of more than $300 billion had become emblematic of the country’s years-long property market crisis, which had resonated throughout the world’s second-largest economy.
The order begins a lengthy process that will see Evergrande’s overseas assets liquidated and its management removed after the company failed to establish a viable restructuring plan.
The company’s executive director pledged that the Hong Kong court’s verdict would have no influence on its domestic operations, but analysts predicted the case would damage international investor confidence in China.
“Given the company’s lack of progress in submitting a viable restructuring proposal and its insolvency… I believe it is reasonable for the court to issue a winding-up order against the corporation, and I so order,” High Court Judge Linda Chan stated.
She noted that Evergrande was supposed to negotiate a “viable proposal” with creditors, get a legal opinion, and involve mainland Chinese authorities, but “none of that has happened”.
Chan is anticipated to provide full grounds for the winding-up order later Monday and will manage the process of appointing a liquidator.
Stability of domestic business
Evergrande’s executive director, Shawn Siu, described the decision as “regrettable,” but promised that the company’s operations in China will continue.
In a statement, he stated that Evergrande’s Hong Kong arm was separate from its domestic unit, and that “the Group will continue to do everything possible to ensure the stability of its domestic business and operations”.
Siu said that the organization would “steadily push forward the key work of guaranteeing the delivery of buildings, maintain the quality of property services without being affected” .
Evergrande shares fell 20.87 percent to HK$0.16 in Hong Kong on the ruling, before the stock market halted trading at 10:19 a.m. (0219 GMT).
Trading was also paused at Evergrande’s electric vehicle division.
However, the announcement had little impact on the overall stock market, with Hong Kong and Shanghai both up at the break.
The actual impact on Evergrande’s building activity and housing delivery arrangements in China is “unknown,” according to Mizuho’s top Asian FX strategist, Ken Cheung.
However, it “reminds investors of China’s property downturn and may keep foreign investors away from returning to Chinese investments for the time being,” said Mr. Wang.
Evergrande’s demise, which began by defaulting on a debt payment in 2021 and entered bankruptcy in the United States this year, has been keenly observed because it was once a foundation of China’s economy.
Previously, China’s building and property sectors contributed for over a quarter of the country’s GDP.
However, President Xi Jinping regarded Evergrande and other property businesses’ debt an intolerable risk to China’s financial system and overall economic health.
Widely anticipated
Since 2020, authorities have gradually curtailed developers’ financial access, resulting in a wave of defaults.
Evergrande reported that its indebtedness were $328 billion by the end of June.
Redmond Wong, chief China analyst at Saxo Markets, stated that “the winding-up of Evergrande’s Hong Kong listing entity has been widely anticipated and should have little impact on the overall market.”
For offshore creditors, the challenge will be “whether the liquidator will succeed in obtaining recognition and assistance from mainland courts to seize assets in the mainland”, he said, calling it a “litmus test for the mechanism”.
Shane Oliver, chief economist at Sydney-based financial services group AMP, said the decision was “another step” in China’s prolonged property crisis and will most likely be controlled “in a way that doesn’t cause major contagion effects to other parts of the economy”.
However, “it tells us that the property crisis is still far from being resolved, and remains an ongoing drag on the Chinese economy” , he added.