Evergrande Liquidated
On January 29th, China Evergrande accepted the Hong Kong High Court’s decision to begin the liquidation process after not developing a definitive restructuring plan. The company is considered the world’s most indebted real estate developer, with $300 billion USD in liabilities.
Stocks for Evergrande and Evergrande New Energy Vehicle Group decreased by approximately 20 percent in the hours before the court order. However, authorities suspended trading for Evergrande and its subsidiaries after the court announced the verdict.
The presiding judge, Justice Linda Chan, appointed Alvarez & Marsal (A&M), a turnaround and restructuring management firm, as Evergrande’s liquidator.
Chan appointed A&M because it would be in the interests of all creditors since it could manage any restructuring plan for the company since its chairman and founder, Hui Ka Yan, is under investigation for illegal activities.
The court appointed Edward Middleton and Tiffany Wong, managing directors for A&M, as provisional liquidators for the company until an official liquidator is appointed. During a press conference after being appointed by the judge, Wong said their priority is “to see as much of the business as possible retained, restructured, and remain operational.” Wong further stated that they will also “pursue a structured approach to preserve and return value to both the creditors and other stakeholders.”
Siu Shawn, Evergrande’s CEO, told Chinese media that the order will not affect the company’s offshore or onshore units. He also said that Evergrande will complete the housing projects that still need to be built despite the liquidation ruling.
Analysis
The liquidation order begins a complicated process that will likely take several years to fully complete due to Evergrande’s large size, the intricacy of its holdings, and determining which entities will receive payments. However, there are several issues that will likely increase the complexity of Evergrande’s liquidation process.
The most significant issue is the potential for the Chinese Communist Party (CCP) to refuse the court order to maintain social stability. Evergrande’s inability to complete the housing projects caused substantial problems regarding how Chinese people felt about the property market. Specifically, individuals who previously believed that property would be a great means to store and create wealth now believe they have lost their investment or retirement. However, some investors tried to utilize their investment by living in their unfinished apartments, even if that meant not having access to utilities or water. The thought that people lost their investment or retirement caused several to voice their anger and dissatisfaction on Chinese social media sites such as Douyin or Weibo.
However, censors would delete the posts and videos to prevent them from fueling more discontent throughout China. Furthermore, investors and local authorities in cities throughout China, such as Xi’an, Guilin, and Shenyang, clashed as they attempted to remove the investors from the properties. Local officials and developers also tried to coax people to leave the apartments by promising them they would finish the projects if they paid the remaining cost of the apartments. However, most investors refuse to pay any more money due to the developers only continuing the projects for one week and then stopping due to a lack of funds.
The liquidation process would likely compound the discontent surrounding the possibility that Evergrande could complete the unfinished housing projects. If the CCP determines that enforcing the liquidation order will not allow for the completion of the unfinished building projects, it will refuse the order. The party also understands that if they do refuse the order, then they would risk greater discontent since refusal likely means that the apartments would likely remain unfinished indefinitely. However, the CCP would hide behind the legal precedent of only accepting five other liquidation applications from Hong Kong courts under a 2021 recognition agreement.
The liquidation process would likely compound the discontent surrounding the possibility that Evergrande could complete the unfinished housing projects. If the CCP determines that enforcing the liquidation order will not allow for the completion of the unfinished building projects, it will refuse the order. The party also understands that if they do refuse the order, then they would risk greater discontent since refusal likely means that the apartments would likely remain unfinished indefinitely. However, the CCP would hide behind the legal precedent of only accepting five other liquidation applications from Hong Kong courts under a 2021 recognition agreement.
Another issue that could destabilize social stability is the possibility that the order would set the precedent for the other Chinese real estate firms that also face liquidation. The precedent means that the Chinese government would face the prospect of foreign creditors seeking the court-ordered liquidation of the other companies. Specifically, the approximately $100 billion USD worth of debt the property development firms have will reach maturity in 2024.
The CCP would have to make the decision regarding whether they would bail out or help out the real estate developers because of the liquidation’s potential to cause social instability. Like Evergrande, these real estate developers also have hundreds of projects that will likely never be completed since they would require approximately $400 billion USD to complete. While the Chinese government required banks to offer loans to the developers to complete the projects, most developers cannot afford to take on more debt. Banks are also hesitant to aid the developers because they increase their already high amount of exposure to debt held by the companies or spread the potential contagion.
The government would also need to decide if they would bail out the businesses since it would also set the precedent that it would in turn a ‘pandora’s box’ of which institutions they would or wouldn’t assist. The real estate developers are not the only sector that requires assistance, with several companies in the shadow banking and tech sectors also declaring bankruptcy or facing significant financial issues.
The government would also have to consider the possibility of various governments at the provincial, county, and municipal levels asking for assistance with their massive amounts of debt. The government would then decide which institutions they would assist and which ones they would let fail and be liquidated. Their decisions would mean that several dozen companies would be liquidated or restructured, with hundreds of people losing their jobs and creating social instability. However, the decision regarding which governments to assist would likely mean the government would increase the use of various measures, such as not paying employees or borrowing against future budgets.