Market Jitters as China Evergrande, World’s Most Indebted Developer, Heads for Liquidation

The development is expected to send shockwaves through China’s already fragile financial markets, with potential implications for global investors and policymakers.

In a pivotal move likely to have far-reaching consequences, a Hong Kong court on Monday ordered the China Evergrande Group, the world’s most indebted property developer with over $300 billion in liabilities. The decision, made by Justice Linda Chan, comes after months of delays and failed attempts by Evergrande to present a concrete restructuring plan. The development is expected to send shockwaves through China’s already fragile financial markets, with potential implications for global investors and policymakers.

Evergrande’s inability to offer a viable restructuring plan despite multiple court hearings prompted Justice Chan to decree liquidation. The company, which defaulted on its debt in 2021, has been struggling to navigate a financial crisis that has rippled through China’s capital and property markets. The verdict is likely to initiate a protracted and intricate process, laden with potential political considerations due to the involvement of various authorities. Offshore investors will closely scrutinize the treatment of foreign creditors by Chinese authorities during Evergrande’s liquidation.

Gary Ng, a senior economist at Natixis, commented on the liquidation, stating, “It is not an end but the beginning of the prolonged process of liquidation, which will make Evergrande’s daily operations even harder.” The majority of Evergrande’s assets are in mainland China, raising uncertainties about creditors seizing assets, the repayment hierarchy of offshore bondholders, and the fate of shareholders.

Evergrande’s shares experienced a sharp decline, trading down as much as 20% before the hearing. Trading in China Evergrande and its listed subsidiaries, China Evergrande New Energy Vehicle Group and Evergrande Property Services, was halted following the court decision.

The liquidation of Evergrande, which holds $240 billion in assets, exacerbates the challenges facing China’s economy, already grappling with a sluggish performance, a distressed property market, and a stock market near five-year lows. Any further deterioration in investor confidence could undermine Beijing’s efforts to rejuvenate economic growth.

Despite the ruling, Evergrande sought another adjournment on Monday, claiming “some progress” in the restructuring proposal. The latest offer involved creditors swapping their debts into shares held by the company’s operations, including its property management and electric vehicle units, which could impact its ability to repay creditors.

Evergrande had been working on a $23 billion debt restructuring plan with a group of creditors known as the ad hoc bondholder group for nearly two years. Talks between Evergrande and the creditors group broke down last week over concerns that the latest offer would negatively impact the interests of certain creditors.

Fergus Saurin, a Kirkland & Ellis partner advising offshore bondholders, remarked, “We’re not surprised by the outcome, and it’s a product of the company failing to engage with the ad hoc group.” He highlighted a history of last-minute engagements that went nowhere and emphasized that the company had only itself to blame for being wound up.

The recovery rate for creditors, according to a Deloitte analysis cited by Evergrande in July, was estimated at 3.4% if the company underwent liquidation. However, after revelations in September that Evergrande’s flagship unit and its chairman Hui Ka Yan were under investigation for unspecified crimes, creditors now anticipate a recovery rate of less than 3%.

The liquidation ruling is not expected to immediately impact Evergrande’s operations, including ongoing home construction projects, as the process could take months or even years for the offshore liquidator appointed by creditors to gain control of subsidiaries in mainland China, governed by a different jurisdiction.

The decision follows a broader trend in Hong Kong, where at least three Chinese developers have been ordered to liquidate since the onset of the current debt crisis in mid-2021. The ruling coincides with an arrangement signed between China’s Supreme Court and Hong Kong’s Department of Justice for the reciprocal recognition and enforcement of judgements in civil and commercial cases.

As China grapples with a deepening financial crisis and Evergrande’s liquidation unfolds, global markets will closely monitor the handling of foreign creditors and the broader implications for China’s economic stability.