Months after China
Evergrande
ran out of liquidity 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
rescue it.
On Monday it became clear how wrong that bet was.
After two years in
limbo
, and with a debt of more than $300 billion, a Hong Kong judge ordered the liquidation of Evergrande, a measure that will trigger a
race of lawyers
to try to find and get hold of everything that belongs to Evergrande that can be sold.
In a small room on the 12th floor of the Hong Kong High Court building, Evergrande lawyers pushed for a last-minute deal.
They argued that a liquidation would harm Evergrande's business and would not help creditors recover their money.
They wanted more time to try
to reach an agreement
with Evergrande's creditors.
Broken furniture outside an abandoned Evergrande shopping complex in Beijing on January 29, 2024. A Hong Kong court on January 29 ordered the liquidation of Chinese real estate giant Evergrande, but the company said it would continue operating, in a case which has become a symbol of the country's growing economic problems.
(Photo by Greg Baker/ AFP)
But after 40 minutes of debate, Linda Chan, the bankruptcy judge presiding over the case, made the decision to issue an order directing Evergrande to liquidate its operations, citing the company's inability to present a concrete proposal to the court for a year and a half.
"I think it would be a situation where the court would say enough is enough," Chan said.
Implications
The order means that Evergrande, which has been limping along for two years, unable to pay its debts or operate normally but still in business, will now likely face a prolonged
period of dismantling
a huge business with projects spanning hundreds of cities and non-profit businesses. related, such as an electric vehicle company.
The order shocked the company's shares, which were listed in Hong Kong, and caused a drop of more than 20% before trading was halted.
The court's decision is likely to have repercussions on China's beleaguered real estate sector and financial markets, already concerned about the Chinese economy.
There isn't much left in Evergrande's sprawling empire that still has value.
And any asset that is valuable may be off limits because ownership in China has become
intertwined with politics.
Evergrande, like other developers,
built and overpromised
, accepting money for unfinished apartments and leaving hundreds of thousands of homebuyers waiting for their units.
Dozens of these companies have failed to meet their obligations, so the government is frantically trying to force them to finish the apartments, putting contractors and builders in trouble, who have not been paid for years.
What happens next in the dismantling of Evergrande will test foreign investors' confidence 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 weakened.
"People will be very attentive to see if creditor rights are respected," said Dan Anderson, partner and restructuring specialist at law firm Freshfields Bruckhaus Deringer.
"Whether they are respected will have long-term implications for investment in China."
Scenery
China
needs investment
from foreign investors now more than ever in its recent history.
The financial markets of mainland China and Hong Kong - a city that for years has been an entry point for foreign investment - have taken such a beating that authorities are rushing to seek policy measures such as a stock bailout fund to shore up confidence.
On Sunday they took steps to end short selling, a practice that allows investors
to bet against a stock.
A man walks past a map of China showing Evergrande shopping complexes at a partially operational Evergrande shopping complex in Beijing.
Photo by Greg Baker/ AFP.
China's property market shows few signs of returning to boom days, in part because Beijing wants to reorient 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 the country, do not help.
Investors are awaiting the resolution of the Evergrande case to see how China will handle litigation over its delinquent companies, of which there are dozens in the real estate sector alone.
Specifically, they will want to see whether the people now in charge of carrying out the liquidation will be recognized by a court in mainland China, something that
has not historically happened
.
Under a mutual agreement signed in 2021 between Hong Kong and Beijing, a mainland 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 of five such requests to local Chinese courts has been granted.
Monday's decision had already been delayed several times over nearly two years, as creditors and other parties agreed to postpone it to give the company more time to reach an
agreement with creditors
on how much they could be paid.
Until last summer, it seemed that Evergrande's management team and some of its foreign creditors who had lent it money in US dollars in Hong Kong were close to closing a deal.
Talks stalled in September, when several senior executives were detained and founder and president Hui Ka Yan was eventually arrested by police.
Impact
Monday's court decision was "a big blow," Anderson said, which "will result in something of a whimper as liquidators pursue the assets."
Speaking to reporters outside the courtroom on Monday, a lawyer representing the main group of creditors said they were not surprised by Judge Chan's decision.
"We have been ready, willing and able throughout the process to reach an agreement with the company," said Fergus Saurin, a partner at Kirkland & Ellis, who is advising the creditors.
"There has been a history of last minute compromises, which have gone nowhere, and in the circumstances, the company has only itself to blame for its liquidation."
c.2024 The New York Times Company