2024-01-30 01:59:18
The Chinese real estate giant Evergrande affirmed that it will continue operating, despite to the verdict of a Hong Kong courtwhich ordered its liquidation this Monday (01/29/2024), in response to legal measures adopted by some of its foreign creditors.
The judicial procedure was initiated, among others, by Top Shine, registered in Samoa, an investor in one of Evergrande’s subsidiaries. High Court Judge Linda Chan cited the company’s “evident lack of progress” in submitting a “viable restructuring proposal”, adding that the liquidation order was “appropriate”.
An offensive once morest two decades of real estate speculation, which China started three years ago, caused a crisis ever deeper and left Evergrande with a debt of 300,000 million dollars (277,000 million euros).
Months later, the company defaulted on its offshore debt obligations, and last month, creditors rejected a proposal to restructure its debt. Monday’s liquidation hearing was delayed from December following Evergrande’s lawyers argued that none of its creditors were seeking the liquidation of the company, which has $240 billion in assets.
What happens now with Evergrande?
The order begins a long process that should involve the liquidation of Evergrande’s offshore assets and the replacement of its management positions. But it is not yet clear how this ruling would affect the company’s vast operations. company in mainland China.
Mainland Evergrande CEO Shawn Siu called the decision “regrettable,” while promising that the company’s operations would continue.
The case is widely seen as a test of whether a liquidation order issued in Hong Kong would be recognized in mainland China. The legal system of Common Law Hong Kong, which remained in force following the former British colony was returned to China in 1997, is preferred by foreign creditors when it comes to recovering debts on the mainland.
Two years ago, Beijing agreed to recognize Hong Kong’s insolvency orders in the Chinese cities of Shenzhen, Shanghai and Xiamen. However, in practice, liquidation orders have been difficult to execute due to China’s opaque legal system.
Legal experts are not sure whether certain legal rules made in Hong Kong are recognized in mainland China. Image: Vernon Yuen/picture alliance /AP
To date, only one such order has been recognized by mainland courts, and they have the power to determine whether recognition is warranted. Chan appointed two liquidators, who might propose a new debt restructuring plan to offshore creditors.
What would be the impact on the Chinese economy?
If the liquidation of Evergrande’s assets on the continent finally comes to fruition, it might be a major setback for the world’s second-largest economy, which is already struggling to recover from a draconian “zero covid” policy that kept much of the country confined. during the pandemic.
China’s real estate sector has been a major engine of growth over the past two decades, helping Beijing’s leaders achieve, at times, double-digit economic growth. By comparison, China’s economy grew just 5.3% last year, due in part to weaker exports and domestic demand, high youth unemployment and a worsening housing crisis.
However, in recent years, several other property developers have been forced to declare bankruptcy, while spending by construction companies has fallen 10% annually for two years in a row. Last year, new home sales by the 100 largest real estate companies fell by more than a third. The country’s local governments, which rely on land sales to boost their budgets, are also deeply in debt and have been forced to cut spending.
Much of the $300 billion Evergrande owes is deposits paid by ordinary Chinese citizens for newly built apartments. It is not clear whether these people will be taken into consideration and prioritized during all liquidations, over foreign creditors.
Most economists already predict that China will grow more slowly in 2024. A worsening housing crisis might further weaken demand and shake the country’s financial system. Last month, Oxford Economics estimated it would take between four and six years to complete all unfinished residential properties.
The bubble in China’s real estate sector
China is a nation of homeowners. Around 80% of families own their homes, and more than 20% of urban families own several properties. Over the past two decades, Chinese consumers invested their savings in real estate, helping property companies’ profits soar.
Speculation drove real estate prices to unaffordable levels. Many economists say the massive housing bubble was allowed to grow for too long before Beijing took action.
In August 2020, in the midst of the pandemic, Chinese President Xi Jinping announced new limits on the amount of debt that real estate sales companies such as Evergrande might accumulate. Xi’s so-called three red lines meant that companies had to ensure that their liabilities did not exceed 70% of assets, that net debt remained below 100% of equity, and that financial reserves remained at 100%. of short-term debt.
The new restrictions laid bare the scale of what has been called a massive Ponzi scheme that Evergrande had been operating. For years, the company had used deposits on future real estate developments to finance current construction projects.
(cp/ers)
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