At a glance
- Evergrande, one of China’s largest construction companies, has been given a liquidation order in Hong Kong
- The company is just one of several that are facing financial risks due to the slowdown in the economy and the property sector in recent years
- While the Evergrande collapse is unlikely to cause a crisis, it increases the likelihood of consolidation in the sector
Following years of financial struggle and an 18-month-long court process, China’s property development company Evergrande is to be liquidated.
The company, which has $300bn in debt, is to have its Hong Kong business liquidated after Justice Linda Chan stated that “enough is enough”, with the company failing to provide a satisfactory restructuring plan. Evergrande’s executive director Shawn Siu said in a statement that the company’s Hong Kong business is separate from its mainland division, and will continue to operate.
However, Shirley Yu, visiting senior fellow at the London School of Economics, disagrees: “I think that there will be an orderly liquidation process in the mainland as well. It is hard for me to imagine that the Hong Kong courts did not discuss this with Beijing before issuing the order. And if you look at the timing of the announcement, it’s a Monday — the beginning of the trading week.”
Yu adds that the announcement comes days after the government announced a series of easing measures, in particular in support of the real estate sector.
The Chinese government has completed the liquidation process of two large companies in recent years, namely Anbang Insurance and HNA Group. Yu says: “The path of Evergrande may follow the experience of these two failed companies. The company may be nationalised after the liquidation process.”
But this is just the latest in a long line of issues that have impacted Evergrande. The company hit crisis point in 2021 after missing debt payments, putting in jeopardy not only its primary property business, but also its multiple other interests, including amusement parks and Guangzhou Football Club. While the Chinese government stepped in to help support the company, which was China’s second-largest property developer, the warning signs were there.
Due to foreign currency exposure, the company filed for Chapter 15 bankruptcy protection in the US in March 2023. Chapter 15 is applied to cross-border insolvencies to protect from creditors foreign companies undergoing restructuring.
Sectoral problems
The problems at Evergrande laid bare the cracks that run through the Chinese property sector, with many companies having to halt projects due to lack of funds. With the real estate sector representing around 30 per cent of China’s overall GDP, it is a sizeable industry, and the collapse of these companies poses a significant risk.
Commenting on the news of the Evergrande liquidation, a spokesperson for the China-focused forecasting company Enodo Economics says: “The liquidation of Evergrande is necessary in the broader context of rectifying the imbalances within China’s property sector. While this development has indeed deepened the prevailing sense of pessimism among investors, particularly with creditors foreseeing a modest 3 per cent recovery rate at best, it is crucial to acknowledge the broader implications.
“The liquidation will be protracted, yet it is a necessary step to conclusively address the Evergrande issue, providing a better foundation for the Chinese property market.”
Yu believes that the Evergrande case should be taken in isolation, as the company first defaulted in 2021. But it will send a warning to other companies, with the prospect of consolidation on the horizon for those that are struggling, and believes that of the top 100 existing companies, there will likely only be 50 remaining by the end of the current real estate cycle.
Across the whole property sector, the rising zombification of companies is creating concern. With property construction stopping mid-project, consumers are becoming skittish and not purchasing for fear the project will fall through. In turn, this is impacting balance sheets and the ability to make payments on loans and bonds.
Property development company Country Garden, for example, defaulted on an international bond in October 2023. The company has around $200bn in liabilities, with nearly $22bn in dollar-denominated bonds offshore. The company moved to stave off further issues in December when it repaid in full a Rmb800mn ($112.7mn) bond and sold off a Rmb3bn stake in the Zhuhai Wanda Commercial Management Group mall operating company. The funds were slated to be used offshore.
In January 2024, Country Garden moved to raise Rmb3.82bn through asset sales, including five apartment buildings, four office blocks, and a shopping mall.
Additionally, developer SOHO China filed for bankruptcy protection in the US in August 2023 after it reported a profit of Rmb13.61mn for the first six months of 2023, a 93 per cent decline on the previous year.
While these companies may have to heed the warning of Evergrande, Yu says that the Evergrande liquidation will not be an inflection point for the Chinese economy. “I don’t think it’s going to cause a financial catastrophe in China, it’s more that it’s the shock factor, and that has already been absorbed by the market,” she says.
