2024-02-12 00:58:48
In the midst of China’s journey in search of the long-awaited economic stability, the Evergrande case stands as a powerful reminder of the risks that threaten business empires, especially those built on indebted foundations. The recent liquidation order of China Evergrande Group, issued by a court in Hong Kong, has transcended beyond the collapse of this powerful entity. This event has triggered an earthquake in the real estate market, a fundamental pillar for the country’s growth that now represents a threat to its delicate financial situation.
The fate of the colossus and its parent company’s vast portfolio of real estate and liabilities has become a key test of Hong Kong’s ability to assert its jurisdiction in mainland China and collect from foreign investors, as well as to glimpse the Beijing’s support for aggrieved homebuyers or its willingness to let big business go to hell.
Founded in 1966 by Hu Jiayin and once China’s largest real estate developer, Evergrande is headquartered in Hong Kong, but 90% of its assets – including more than 1,300 housing projects in 280 cities – are in mainland China, where The court of the former British colony has no jurisdiction. In the past, Hong Kong courts have issued liquidation orders for Chinese companies, and cross-border proceedings have been challenging for many of them.
Will the liquidation order be executed in China?
This process is anticipated to be a complex and arduous challenge, both from a legal perspective and in terms of financial engineering. If the Chinese courts recognize the ruling issued in Hong Kong, this could set a precedent for other real estate developers with financial difficulties in the country, generating a significant impact on the sector.
“I think there is not going to be a liquidation in China. If the promoters fail to have effective control of all their assets and a liquidation process occurs, it is likely that they will not be able to meet their financial obligations, which would result in non-payment of debt or defaults,” he explained to La Razón. Alicia García Hererro, chief economist for Asia-Pacific at the French investment bank Natixis in Hong Kong.
In the economist’s opinion, “this has consequences, especially in the image of a country of that size, which has not paid or even restructured, and which does not allow access to the assets of the companies liquidated in its territory. This happens in Brazil, but China is not Brazil. Furthermore, it is a problem even for the international ratings of companies in the Asian country,” she said.
China created a pilot scheme in 2021 under which courts in Shanghai, Xiamen and Shenzhen can recognize insolvency proceedings ordered by Hong Kong. However, since Evergrande is headquartered in Guangzhou and many of its assets, valued at $240 billion, are spread across the country, the liquidator will have to go to the courts of each city where its subsidiaries are located to try to take control.
An even greater uncertainty for Beijing is its goal of guaranteeing the delivery of some 20 million unfinished homes across the country, including those pre-sold by the embattled Evergrande to more than 5 million Chinese buyers.
Following Monday’s liquidation order, the company’s CEO, Shawn Siu, promised that “unfinished construction projects will be completed,” according to Chinese financial outlet 21st Century Business Herald. Furthermore, he stated that the liquidation ruling will only affect the Hong Kong-listed unit of the group and will not have any impact on the domestic and foreign units of the group as they are “independent legal entities.”
Chinese Vice Premier He Lifeng also addressed the faltering local real estate sector, stating that “efforts should be made to establish a financing coordination mechanism for urban housing projects and promote the implementation of specific financing projects,” he reported. the state media China Daily.
Regulatory regulations that unleashed the storm
The conglomerate’s current situation marks a turning point and a new chapter in China’s turbulent economic saga. Since 2020, the communist regime’s efforts to curb speculation and excessive debt by developers have backfired, plunging this sector into chaos and threatening both its own and global economies. More than three years ago, the so-called “three red lines” were enacted, which required builders to keep their liabilities (debt) below 70% of their assets, to maintain a debt-equity ratio of less than 100% and to have of a short-term cash/debt ratio of at least 100%.
The liquidity squeeze initiated by Supreme Leader Xi Jinping has led to defaults, most of them on offshore debt. Of the 50 developers with the most dollar-denominated bonds issued in Hong Kong, two-thirds have defaulted on interest payments. Consequently, the market value of those bonds has largely evaporated, losing nearly 90% of their value over the past two years.
And at its peak, the real estate market contributed to almost 30% of China’s GDP, a staggering figure that exemplifies both its importance and its potential for instability.
From economic power to financial debacle
Evergrande carried a liability that exceeded 300 billion dollars (about 304 million euros), thus becoming the most indebted real estate developer in the world, a dishonorable accolade that underlines the systemic risk posed by its possible collapse. Likewise, the response to the non-payment of its extraterritorial (offshore) debt in 2021 – the refusal of the Chinese Communist Party (CCP) to rescue this monster – gave rise to hundreds of litigations and a situation of maximum uncertainty in the sector.
The real estate titan worked on a series of restructuring proposals that collapsed after the Chinese government ruled it could not issue new debt as its flagship onshore unit and its chairman were under investigation for unspecified alleged “crimes.”
Apparently, the last round of negotiations with its main creditors ended in a breakdown, so they decided to support the liquidation request presented in mid-2022 by a local investor, due to the non-payment of 110 million dollars for the purchase of shares.
Now, offshore creditors expect the company’s liquidator, Alvarez & Marsal, to propose a new restructuring plan for its offshore debt and only proceed to liquidate if no agreement is reached.
Stimulus measures
The Asian giant has to balance the need to deleverage the housing market, while avoiding a financial catastrophe while trying to find a way to complete millions of pre-sold homes.
In fact, it has been studying measures to boost the sector. Last Saturday, the southern city of Guangzhou announced that it was relaxing restrictions to allow home buyers to buy as many homes as they want, as long as the properties are larger than 120 square meters.
According to Chinese media, other megacities such as Beijing, Shenzhen and Shanghai are likely to follow suit to help accelerate property sales and reduce inventory. Dozens of Chinese provinces have already offered preferential mortgage rates to first-home buyers, as another measure to boost sales.
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